Debt fund managers go bullish on G-Sec after global index inclusion

Cite better balance between demand and supply as well as inflation relief

Debt fund managers are increasingly embracing government bonds due to favourable demand-supply dynamics ahead of their inclusion in global bond indices, along with improvements in the macroeconomic landscape and easing inflation.

“The demand-supply situation is well-managed, given the addition of new demand forces and lower-than-expected supply of bonds. The Reserve Bank of India’s (RBI’s) liquidity policy also seems to have changed, with some easing observed. Directionally, we all see headline inflation remaining lower than it was six to seven months ago,” said Rajeev Radhakrishnan, chief investment officer (CIO)-fixed income at SBI Mutual Fund (MF).

As of the end of February, most dynamic bond funds — the only category offering complete flexibility to fund managers in terms of asset class and duration — were heavily invested in government securities (G-Secs), with exposure having increased over the past few months.

The ICICI Prudential All Seasons Bond Fund, the largest in its category, has 58 per cent of its corpus invested in longer-term G-Secs, up from 39 per cent in January.

“Given that both fiscal deficit and current account deficit have been lower, which has made the model slightly more bullish, we have added G-Secs to the portfolio,” said Manish Banthia, CIO-fixed income, ICICI Prudential MF.

SBI Dynamic Bond Fund now has nearly 80 per cent exposure to G-Secs, compared to 62 per cent six months ago.

The inclusion of government bonds, mostly longer-term, has majorly increased the average maturity of dynamic bond funds. Fourteen of the 22 schemes now have an average portfolio maturity of 10 years or more.

Schemes offered by Bandhan MF and DSP MF have the highest average maturity due to their overweight stance on 20-30-year government papers.
 

Bandhan Dynamic Bond Fund, with an average maturity of 27 years, has invested almost 85 per cent of its corpus in 2053 G-Sec bonds.

“In our active duration funds, we continue to overweight 30-year government bonds... it is logical to lock away yields for higher periods offered today, rather than settling for similar yields for shorter periods. There is a real risk of reinvestment yields being meaningfully lower when current investments mature," said Suyash Choudhary, head-fixed income at Bandhan MF, in a recent note.

While some fund managers place their bets on longest-duration bonds, others stick to 10-year papers.

“We are increasing duration wherever feasible. Given the flat curve, 15-year papers are preferred as they offer better risk/reward. At every spike, we are taking longer bets. However, for long-term investment, one can opt for the longest maturity,” said Abhishek Bisen, head-fixed income at Kotak Mahindra Asset Management Company.

While fund managers foresee some decline in yields, they do not expect rate cuts this year.

“I am biased towards 10-year government bonds as we do not anticipate rate cuts in India this year. Growth is on the right track, while inflation remains at 5 per cent. Only when inflation approaches 4 per cent will the RBI consider rate cuts. Monetary policy will depend on domestic growth dynamics rather than movements in US interest rates," said Radhakrishnan.