Corporate bonds gain favour as government securities' yields remain steady

Business Standard

16-07-2025

Debt market investors are reallocating funds to shorter-tenure corporate bonds due to attractive yields, as government securities (G-Secs) yields remain steady.
The yield spread between AAA-rated five-year corporate bonds and government securities of similar maturity has widened by 22 basis points since the first week of June.
Since the Reserve Bank of India (RBI) cut the policy repo rate by 50 basis points on June 6, yields on government bonds have remained steady, while corporate bond yields have hardened.
'With government bond yields effectively locked in and limited capital gain potential, the richer accrual opportunities in corporate bonds make them more appealing. There is clear interest in blending portfolios that target an overall yield of around 8 per cent,' said Ajay Manglunia, executive director and head of fixed income markets at Capri Global Capital Ltd. 'To achieve that, investors are allocating across both G-Secs and corporate bonds, with the latter offering better carry given the stagnant nature of sovereign yields,' he added.
Market participants noted that, given abundant liquidity in the system, demand from banks, mutual funds, and insurance companies for such bonds has surged.
With limited supply of short-term G-Secs, and the government's preference for longer-term issuances, corporate bond issuers—especially in the AA/AA+ category—are stepping in to meet demand, flooding the market with short-tenure bonds. Consequently, while demand remains strong, oversupply has led issuers to offer higher yields. Of the Rs 8 trillion the government plans to borrow in the first half of this fiscal year, 75 per cent will be through bonds with tenures of 10 years and above.
'There is a huge supply of corporate bonds now. Appetite is there because of abundant liquidity in the system. Also, there is not much credit demand. Either they are putting it in the Standing Deposit Facility (SDF) or the Variable Rate Reverse Repo (VRRR). So, half of the money that is left, they are trying to put into mutual funds. That is why many mutual funds are becoming anchor investors,' said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.
The net liquidity in the banking system was in surplus by Rs 2.99 trillion on Tuesday, according to the latest data from the RBI.
As long as system liquidity remains elevated, corporate bond supply—especially from private AA-rated issuers—is expected to remain robust.