INFORMATION
2025-11-21T09:48:27
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Aarti Manjare
2025-11-21T09:48:27 | 2 Mins to read
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In today’s market, simply picking a bond because it “looks safe” is no longer enough. Smart investor in India use bond spread to understand the true value and risk of a bond before investing.
But what exactly does this mean? And how can you use bond spreads to make better investment decisions?
Let’s break it down,
Bond spreads refer to the difference in yields between two bonds, usually a government bond (Considered safer) and a corporate bond (which carries more risk).
Example:
If a 10-year Government of India bond gives 7% and a corporate bond gives 9%,
Spreads = 9% - 7% = 2% (200 basis points)
This 2% tells you how much extra return you’re getting for taking additional risk.
India’s bond market is unique because it includes:
Each comes with different risk levels. Bond spreads help you compare them fairly.
| Spread Type | What It Means | Investor Action |
|---|---|---|
| Widespread (High Difference) | Corporate bond is riskier or market is uncertain | Be caution, check credit rating |
| Narrow Spread (Low difference) | Corporate bond seems safer or market is confident | Could be a stable investment |
| Spread Increasing | Rising risk or fear | Avoid or demand higher return |
| Spread Decreasing | Improving stability | Good time to invest |
Most investors in India compare against 10-year G-Secs because they are considered the safest.
Check corporate bonds of similar maturity. (Comparing a 3-year bond with a 10-year bond can give false signals).
AAA bond with a 1% spread may be safer than a BB bond with a 4% spread.
If spreads across many sectors are increasing, it may be a sign of economic stress.
In India, some bonds are hard to buy/sell. A high spread might simply mean low liquidity, not high risk.
Example:
| Bond Type | Yield |
|---|---|
| 10-year G-Sec | 7.2% |
| PSU AAA Bond | 8.0% |
| Private AAA Bond | 8.4% |
| AA Corporate Bond | 9.2% |
Observations:
If a high-quality bond shows a big spread, it may be temporarily mispriced, good opportunity!
When spreads widen across the market, it may indicate upcoming recession or credit risk.
Investors use spreads to mix low-risk and high-return bonds efficiently.
When RBI raises interest rates, spreads often widen because risky bonds become less attractive. When RBI cuts rates, spreads narrow as investors seek higher returns elsewhere.
So, always track:
If yield is the surface, bond spreads are the story behind the numbers.
They help you compare options and choose the most profitable and low-risk investments, especially in a diverse market like India.
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BondsIndia is a brand name of Launchpad Fintech Private Limited, an e-business platform for Fixed Income securities that uses technology as a means to provide quality & real-time financial solutions to users.
