Floaters find few takers

The lack of yield differential is shooing away investors from floating rate issues of both government paper and corporate debt.

The spread on actively traded benchmark corporate bonds such as those of Housing Development Finance Corporation (HDFC) over comparable gilt is negative at a time when the trend is bullish on gilts.

According to dealers, most of these benchmark papers carry a floating rate of interest and thus the yield differential which a market player earns as a spread turns negative.

Participants are also cautious about the floating rate bond announced by the Reserve Bank of India to raise Rs 4,000 crore as part of the government borrowing programme.

According to them, the instrument does not offer any yield advantage over comparable gilts or corporate bonds.

A dealer said, even though the market wanted a floating rate instrument to hedge against inflation, in the secondary market, there is hardly any appetite due to lack of interest rate advantage. Therefore, in the forthcoming auction, the market is looking forward to the fixed rate, short-term 6.65 per cent 2009.

The floating rate 11-year bond is trading at 5.10 per cent whereas a fixed rate 7.38 per cent 2015 is at 6.03 per cent, displaying a negative spread of 93 basis points.

Similarly, a comparison shows that the 5-year floating rate bond of HDFC is offering 5.41 per cent, whereas the fixed rate bond is at 6.68 per cent.

Compared with highly traded government security of 5-year tenure, the spread is negative as the yield is at 5.41 per cent against a gild yield of 5.90 per cent.

According to dealers, the recent change in RBI guidelines permitting banks to transfer gilts under the statutory liquidity ratio to the held-to-maturity category "" which is not valued at the market rate "" has made the banks go for value buying. This explains why floating rate issues are not much preferred at present.