Fund houses reduce debt buying amid rising yields

This, as scope for a rate cut in the short-term is limited

It is not only foreign institutional investors (FIIs) showing a lower appetite for Indian debt. Mutual funds (MFs) have also reduced their investment in such instruments as bond yields head north.

Data from the Securities and Exchange Board of India (Sebi) show the net buying by fund houses in debt was Rs 17,364 crore last month, close to that in July 2014 at Rs 17,055 crore. Fund houses were net buyers by Rs 99,456 crore in March 2014. Before that, they had been net buyers to the tune of Rs 1.1 lakh crore in March 2012.

“Long-term investors continue to pump in money but short-term investors have slowed their investments, as the scope for rate cuts in the near term is seen as limited,” said R Sivakumar, head of fixed income at Axis MF.

Bond yields have been rising despite three rate cuts by the Reserve Bank of India since the start of 2015. This is because the Street expects an extended pause by RBI after the last reduction on Tuesday. The next cut could be in this financial year’s last quarter. This is because there are near-term risks to inflation due to factors like rising crude oil prices and monsoon issues. “It is not the end of the rate cut cycle but it might be a long pause by RBI. It is a very good environment for investing in bonds as long as the inflation trajectory remains lower. Most clients have already made the allocation they wanted to in bond funds, which is why incremental flows have slowed. I would not expect the same pace of bond buying from fund houses as in the past As investable surplus picks up with corporates, bond allocations might resume,” said Suyash Choudhary, head, fixed income, IDFC MF.

In May, FIIs were net sellers in debt by Rs 7,973 crore, show Sebi data. They turned net sellers after a gap of one year. So far in June, they have been net sellers by Rs 493 crore.

The yield on the old 10-year bond had risen to 7.99 per cent on May 7. On Thursday, it ended at 8.01 per cent, compared with Wednesday’s 7.95 per cent. The new 10-year bond yield ended at 7.8 per cent, compared with Wednesday’s 7.74 per cent.

“Bond yields  tracked the rise in yields in US and the euro zone. The yields might continue to trade in a range, unless there are new triggers,” said Ashutosh Khajuria, president (treasury), Federal Bank.