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    State government bonds back in favour, yields drop

    Synopsis

    The gap between the SDL Index and the 10-year benchmark paper stood at 59 basis points until last Friday.

    Agencies
    Nine states will seek to collectively raise 18,200 crore in an RBI auction on Tuesday.
    Mumbai: Investors betting on state government debt are set to gain as the yield gap between the sovereign and state bonds (SDL) is narrowing.

    The spread, or differential, with the benchmark yield narrowed significantly, making it easy for the natural calamity-hit states to borrow cheaply. Yield spreads dropped about 60 basis points since April 8.

    “State bonds are coming back gradually as investors are regaining confidence in them,” said Ajay Manglunia, head of fixed income at JM Financial. “The narrowing spread is a reflection of that. Institutional investors now prefer state bonds over any private sector entities, where risk aversion still persists.”

    Cheaper Funds
    The gap between the SDL Index and the 10-year benchmark paper stood at 59 basis points until last Friday, compared with 118 basis points on April 8. Markets were shut on Monday due to Eid.

    The Reserve Bank of India (RBI) has permitted the states to withdraw from the consolidated sinking fund to meet their redemption commitments. This could cover 45% of their payments for this fiscal. Last week, the central government decided to increase borrowing limits of states from 3% to 5% of GSDP for FY 21.

    “We continue to invest in SDLs selectively as they continue to offer attractive yields,” said Kumaresh Ramakrishnan, CIO - fixed income, PGM India Mutual Fund. “In general, the SDL yield trajectory has followed G-Secs, although supply pressure from SDLs to fund expanding deficits is likely to prevent any spread compression over G-Secs.”

    Nine states will seek to collectively raise 18,200 crore in an RBI auction on Tuesday.

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    The Economic Times