Fund houses and insurers may buy bonds if yields rise

Few fund houses which were running short-duration due to which with rising yields they have already started building durations

The Street expects the yield on the 10-year benchmark government bond to touch 9.25 per cent soon. At that, bonds will attract buying interest because after hitting the peak, yields will start falling, resulting in gains.

Earlier this month, the yield had breached the nine per cent mark and the first auction of the financial year saw a partial devolvement on primary dealers on the longest tenure bond (9.23 per cent, 2043).

Badrish Kulhalli, head of fixed income at HDFC Life, said while each company may have its own assessment, a rise would lead to a rise in interest to buy. Fund houses had cut their duration by an average of three-five years in the last few months in anticipation of rising yields. Yields have been rising due to the Reserve Bank of India auctioning government bonds every week, while the Street does not have much appetite for them.

Nirakar Pradhan, chief investment officer of Future Generali India Life Insurance, said the reduction in duration was seen in the unit-linked portfolio where the duration on an average was now five years. On the traditional side, he said durations had gone up.

According to industry sources, while life insurers might look at an average tenure of eight-ten years, general insurers would prefer shorter tenures of one-three years. This is because, according to the Insurance Regulatory and Development Authority rules, life insurers cannot focus too much on short-term and very short-term durations as part of their asset liability management.

"Most of this duration cut activity is restricted to the Ulip portfolio, since traditional portfolio has to rely on longer-term funds leaving lesser possibility of short-term bonds," said the chief investment officer of a private life insurance company.

Duration is measured in number of years and it is a measure of the sensitivity of the price of fixed-income instruments to a change in interest rates.

"We had cut duration very aggressively in January-February in preparation of the start of the new borrowing calendar. The industry is currently running duration in long-term funds in the range of five-six years. In January, it was about 9-10 years. If yields rise further then fund houses may start buying bonds," said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.

There are a few fund houses, which were running short-duration products due to which with rising yields they have already started building durations.

"We have been adding duration because we were short in duration between October and March. As yields have now breached 9 per cent, this is a good entry opportunity for us. We were underweight duration when yields were below 8.5 per cent. Axis Dynamic Bond fund was having an average maturity of about 2.5 years, now that has moved up to about five years," said R Sivakumar, head of fixed income and products, Axis Mutual Fund.