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Widening spread opens window for debt MFs to raise credit risk slightly

Difference in G-sec and AA corporate rises to 113 bps from 88 bps in six months

Sebi impact: Debt MFs may become more fairly valued in future, say experts

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Enhancing returns through a higher credit risk is one aspect that some AMCs are looking at post the loss of tax advantage

3 min read Last Updated : Apr 14 2023 | 7:55 PM IST

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The rising differential in yields being offered by the top rated bonds and the riskier debt papers has created room for debt fund managers to generate extra returns by raising the credit risk in portfolios to a certain extent.

The yield differential (known as credit spread) has been on an upward trajectory since October 2022. The difference in yields of government bonds (g-sec) and five-year AA corporate bonds rose from 88 basis points (bps) in September 2022 to 113 bps in March 2023. During the same period, the spread between five-year AAA corporate and g-sec rose from 16 bps to 54 bps.

"Spreads are normalising after shrinking to a record low a year back. There has been a gradual expansion since then. It may still go up marginally," said Joydeep Sen, an independent debt market analyst.