Yield spreads between the Indian government bonds and state debt are set to widen, with investors seeking a premium on state bonds following a massive borrowing plan for this quarter, traders said on Monday.
The yield curve between the two segments, particularly at the longer end - 14-year to 40-year - is expected to steepen sharply.
"State debt yields are expected to be impacted once investor fatigue sets in," said Vijay Sharma, senior executive vice president at PNB Gilts. Sharma estimates spreads to widen by 5-10 basis points (bps).
Indian states are set to raise 2.37 trillion rupees ($28.94 billion) by way of bonds in July-September after raising 1.68 trillion rupees in the previous three months, below the original target of 2 trillion rupees.
Over the last five quarters, states have raised 58-88% of their planned borrowing, but that could go up to 90% of the target in the current quarter as capital expenditure picks up, traders said.
India's benchmark 7.26% 2033 bond yield was trading at 7.12% on Monday, while the 10-year state bonds were at around 7.36%, with a spread of about 25 bps.
"The longer end of the curve was protected due to demand from long term investors like insurance companies and provident funds, which we expect will moderate going forward," said Arun Srinivasan, head of fixed income at ICICI Prudential Life Insurance Co.
States raised 45% of their cash needs through bonds with maturities over 12 years in April-June, a trend that traders expect to continue.
"The spread between the 10-year and the 40-year bond yield is expected to rise to 40 basis points in the medium term," ICICI Prudential Life's Srinivasan said, from around 25 bps currently. ($1 = 81.9000 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Swati Bhat and Dhanya Ann Thoppil)
