Corporate bond market: Banks are gearing up to shift their focus towards corporate bonds earmarked for long-term investment, buoyed by current elevated yields and insulation from market-induced markdowns, according to treasury officials.

Beginning April 1, corporate bond investments will be permitted under the held-to-maturity (HTM) category for the first time, provided transparency in fair value disclosure and protection against mark-to-market fluctuations, as outlined by the Reserve Bank of India.

Notably, the removal of the cap on HTM investments, previously restricted to 23 per cent of deposits and predominantly comprising government and state debt, is set to open new avenues for banks seeking higher returns.

The current yield spread of over 50 basis points in favour of corporate bonds presents an attractive proposition for banks eyeing stable returns amidst market volatility.

"Starting April, AAA-rated bonds, particularly those issued by state-run entities, emerge as appealing options for HTM portfolios, offering higher yields compared to state bonds while minimizing credit risk," remarked VRC Reddy, Treasury Head at Karur Vysya Bank.

Government bond yields spanning three to five years hover around 7.06-7.08 per cent, while corporate bonds of similar tenure yield between 7.62-7.70 per cent, underscoring the allure of corporate debt in the prevailing market scenario.

Market experts anticipate major banks to gravitate towards highly-rated and established corporate entities to mitigate credit risk within the HTM segment.

Names such as Power Finance Corp, REC, and Power Grid Corp are tipped as favoured choices among AAA-rated state-run companies, cited Alok Singh, Group Head of Treasury at CSB Bank.

Anticipated improvements in liquidity conditions could further narrow the yield spread between government and corporate bonds, easing below 50 basis points, as per industry projections.

According to Venkatakrishnan Srinivasan, Founder and Managing Partner at Rockfort Fincap, some banks have already initiated steps to ramp up exposure to corporate bonds, with this trend expected to gain momentum in pursuit of higher yields.

Additionally, certain sectors such as infrastructure may witness increased interest as banks strive to fulfil priority-sector lending targets through heightened exposure to corporate debt, noted a treasury head from a state-run bank, speaking on condition of anonymity.

(With Reuters inputs)