Corporate bond spreads have been declining ever since the spike in Apr-20. 5-year 'AAA' corporate bond spread (w.r.t 5-year G-Sec yield) turns negative for the first time in eleven years.

Insight: The influx of liquidity has impacted the corporate credit curve unevenly. The 'AAA' spread turned negative - falling from 31 bps in Mar-21 to -15 bps in the first week of May-21 while the 'AA' spread fell from 107 bps to 64 bps in the same period. The tightening of the spread was not witnessed in 'A' spread as it saw a meagre decline of 19 bps (290 bps to 271 bps) in the same period. The 'AAA' and 'AA' spreads are well below its long-term average of 81 bps and 133 bps, respectively while the 'A' spread is above its long-term average of 254 bps. The spread between 'A' and 'AAA' bonds is at a ten-year high of 287 bps, this suggests that the influx of liquidity has had an uneven impact as investors chose the top end of the credible bonds to park their funds - despite the narrowing of those spreads. RBI's policy initiatives such as the G-SAP auction have contributed to softening of G-Sec yields. The trickle-down effect and economic recovery in the coming months could benefit the lower graded bonds.

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