Core Insights - The recent issuance of Adani Enterprises' five-year non-convertible debenture (NCD) offers a coupon of 8.9%, significantly higher than the 6.5% offered by a five-year fixed deposit from a PSU bank, highlighting the bond market's pricing of risk, credit quality, and liquidity [1] Yield Spread - Yield spread is defined as the difference between the yields of two comparable bonds, typically with similar maturities, and is a crucial concept for fixed-income investors [4][2] - For example, a 10-year government security yielding 6.5% compared to an 8% AAA-rated corporate bond results in a yield spread of 1.5 percentage points, or 150 basis points [5] - Spreads can be calculated among various types of securities, including government securities and corporate bonds, and are influenced by shifts in interest rates and economic conditions [6][7] Types of Spreads - **Term Spread**: The difference in yield between long-term and short-term government securities, reflecting investor expectations regarding economic growth and inflation [8][9] - **Liquidity Spread**: The additional yield demanded for bonds that are harder to trade in the secondary market, with frequently-traded bonds typically offering lower yields [12][13] - **Credit Spread**: The extra yield investors require for holding a corporate bond over a risk-free government security, compensating for default risk and issuer financial health [14][15] Market Behavior - Credit spreads tend to widen during economic stress or sector-specific concerns, as seen during the IL&FS default, which caused spreads to surge across the NBFC sector [17] - Conversely, spreads narrow when economic growth improves and liquidity conditions ease [18] Investor Guidance - Retail investors are encouraged to compare bond yields with appropriate benchmarks, especially in an environment where high returns are advertised [20] - It is essential for bond investments to align with individual time horizons, risk tolerance, and liquidity needs, with professionally-managed debt funds often providing a safer investment route [21]