Banks, Mfs Fancy Low-Rated Papers

AA-rated corporate papers and even those rated notches below are catching the fancy of mutual funds (MFs) and banks. At a spread of 100 basis points to 325 basis points over corresponding maturity gilts, they are offering a better risk-adjusted returns than the AAA and AA+ corporate bonds.

The AAA and AA+ five-year corporate papers are being quoted at a very fine spread of 34 basis points and 50 basis points, respectively.

Corporate bond spreads have crashed in the last one year. While the spread over the AAA five-year corporate paper has been snipped by 108 basis points to 34 basis points, that over the similar maturity A-rated paper has been compressed by 172 basis points to 328 basis points.

The yield on the benchmark 10-year gilt has come down by 140 basis points during the same period to 6 per cent.