Demand for government securities rises due to shortage of SDL and AAA rated corporate bonds

Demand for government securities (G-Secs) has increased in recent days, leading to a sharp decline in yields on these instruments, due to the limited supply of government development loans (SDLs) and government bonds. companies rated AAA since the beginning of the current financial year.

Additionally, government bond yields also fell as traders hedged their short positions. Over the past two weeks, the yield on the benchmark 6.54%-2032 bond has fallen 18 basis points and is currently trading at the 7.0422% level. “We saw good demand in G-Sec’s weekly supply at the start of the year, largely due to the absence of any major SDL and corporate bond supply, coupled with a maturity of G-Sec worth Rs 27,000 crore,” said Sanjay Pawar. , Fund Manager – Fixed Income, LIC Mutual Fund Asset Management.

Since the start of the financial year, states have raised just over 25% of the total amount of the budget to date, worth Rs 8,000 crore, against a budgeted amount of Rs 31,625 crore. Market participants said most states stayed away because Finance Minister Nirmala Sitharaman in the Union budget announced a 50-year interest-free loan of Rs. States to enable them to spend on investments, particularly in infrastructure.

Additionally, the issuance of AAA-rated corporate bonds in the primary market has dried up and only 3-4 issuers have tapped the market to raise funds, as the higher coupon demanded by investors keeps most transmitters on the key. Usually the first month of a financial year sees a very reduced supply due to low capital expenditure. According to data compiled from market sources, companies have so far raised around Rs 4,000 crore, compared to around Rs 15,000 crore raised in the same period last year through AAA rated corporate bonds. .

Market participants said investor sentiment improved after the release of the MPC minutes, and the lack of supply in one segment is helping government bond yields. “We think some segments of the market find the higher yields in the market (7% more) attractive and also the fact that in general bond supply has been down over the last 2-3 months. , which means it is demand from real money players,” said Puneet Pal, Head of Fixed Income, PGIM India Mutual Fund.

Traders believe that government securities yields will trade in a very wide range going forward, as the shift in investor demand is transient. The market will be watching the FOMC meeting and the domestic CPI inflation numbers closely. Fund managers expect the yield on a 10-year bond to trade between 7.00% and 7.30%. However, going forward, yields may rise slightly due to the huge weekly bond supply in the first half of the fiscal year.

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