Demystifying Yield Spread on Corporate Bonds Trades in India

Purpose – This paper aims to study the market dynamics of corporate bond yield spread in India and tried to identify the possible factors affecting bonds' liquidity, credit quality and therefore their yield spreads.Design/methodology/approach – A large sample of daily corporate bond trade data, classified into Issuers Segment-wise and Rating-wise, are analyzed within a basic statistical framework and Fixed Effects Panel Regression Model.Findings – The average traded yield spread, its daily average variation, both are found to be the least in case of bonds issued by Banks/PSUs/FIs, followed by NBFC and Corporates. Securities, mostly issued by Banks/PSU/FIs, and of 8-10 years of residual maturity and 1-1.5 years of age, with a higher level of creditworthiness, are found to be more liquid. Liquidity measures, captured through various bond characteristics and trade statistics, even if found to be statistically significant but with less explanatory power. Corporate bond yield spreads in India are also affected by equity market movements.Research limitations/implications – Even if a significantly large sample is used, infrequent and irregular trades in most of the securities, leading to an unbalanced panel, may cause some of the major findings to be with insufficient explanatory power.Practical implications – The research findings will help the concerned market players to understand the dynamics of a developing corporate bond market better, and also to gain insights towards the movement of the yield spread and its possible variation due to multiple factors.Originality/value – To the best of my knowledge, this work made the first attempt to demystify the corporate bond yield spread in the Indian context