Post-demonetisation, we saw yields for government securities fall sharply. Even though there was some retreat after the announcement of incremental cash reserve ration (CRR), government security (g-sec) yields seem set to fall further given the expectations of a rate cut. Unlike g-sec yields, which are primarily driven by interest rate trends, yields on corporate bonds are influenced by other fundamental factors as well. The difference in yields of two bonds issued by qualitatively different entities (here, g-secs and corporate bonds), but carrying a similar maturity, is referred to as the credit spread. If the spread between a corporate bond and its g-sec peer widens, it may indicate a higher risk attached to that bond. For investors in credit opportunities and corporate bond funds, it is worth considering if the risk can play out.
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