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India in stimulus mode: Funds bet big on short-tenure bonds post rate cut

The yield on the benchmark 10-year bonds, for instance, is up five basis points this month. In comparison, the five- and three-year yields have fallen at least 22 basis points in the period

Subhadip Sircar & Kartik Goyal | Bloomberg 

Better rated firms moving to bond mkt, says RBI report

Short-tenor bonds are in demand in India, thanks to rising expectations for more interest-rate cuts.

This week’s data showing further easing in inflation has raised the odds of the central bank adding to last week’s cut as early as April just when investors including HDFC Standard Life Insurance Co. are concerned that the looming supply of sovereign debt will push up long-end yields.

“The bond demand-supply dynamics are likely to deteriorate going ahead, negating a big move down in long-term yields,” said Puneet Pal, deputy head for fixed income at DHFL Pramerica Asset Managers Pvt. The fund favors maturities of less than or equal to four years, he said.

Worries about the supply overhang emerged after Prime Minister Narendra Modi’s government announced a record 7.1-trillion-rupee borrowing program on Feb. 1. The debt sale is in addition to states selling more paper to fund slippages from farm-loan waivers.

The yield on the benchmark 10-year bonds, for instance, is up five basis points this month. In comparison, the five- and three-year yields have fallen at least 22 basis points in the period.

The other uncertainty plaguing investors is how proactive the Reserve Bank of India will be in extending its bond purchases. HSBC Holding Plc. estimates the RBI may buy between 1.8 trillion to 2 trillion rupees of debt in the year starting April 1, versus the 2.7 trillion rupees it likely spent so far this fiscal.

“The market is concerned about the quantum and pace of bond purchases for the next year,” said Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset Management Co. “That’s the reason why we’re not seeing as enthused a rally, especially in the 10-year benchmark.”

Cash Crunch

Concerns about liquidity continue to linger months after defaults by an infrastructure lender pushed up borrowing costs for businesses. With liquidity typically turning tight with the April-March fiscal year nearing an end, another credit event -- should it occur -- will worsen the crunch, investors said. That’s another reason driving them to shorter and liquid papers.

“The crisis that began after the IL&FS default in September is not over yet,” said Pankaj Pathak, fixed-income manager at Quantum Asset Management Co. “The widening of spreads between corporate and sovereign yields reflects lack of confidence in the credit market.”

Here are some other comments from mutual fund and insurance managers:

Bajaj Allianz Life Insurance (Sampath Reddy, chief investment officer)

  • RBI policy has a dovish undertone, and therefore positive for bonds. However, concerns remain on fiscal front and higher bond supply. There could also be some pressure on yields if there’s a credit crunch or further rise in oil prices
  • Continue to prefer the shorter to medium term part of the yield curve

Kotak Mahindra Asset (Lakshmi Iyer, head of fixed income)

Support in the form of OMO in Feb and reasonable liquidity in the system is what’s keeping the short-bond yields supported.

That’s going to be the anchor factor for yields because there’s not going to be supply in that segment

In the govt bond space, the sub-10 year segment -- 3-, 4-, and 5-year bonds -- are proving to be a better bet in this scenario

Quantum Asset (Pankaj Pathak, fixed income fund manager)

Continue to choose safety over credit, and liquidity over spreads and returns, while investing in 2019

Expects long-term bond yields to head higher. However, likes front-end of the yield curve -- 1-to-5 year maturity bonds -- especially high quality state-run companies that are trading at attractive spreads

HDFC Standard Life (Badrish Kulhalli, head of fixed income)

Supply concerns will temper the drop of the sovereign yield curve. This fiscal year’s borrowing has been raised and next year’s is also large. We expect some steepening of the yield curve. Shorter-term bonds look attractive at this juncture

DHFL Pramerica Asset (Puneet Pal, deputy head for fixed income)

Expect the sovereign yield curve to steepen as the and expectations of a further rate cut will support the short end -- 1-to-4 year of the curve

Expect the credit spreads to remain elevated as risk aversion likely to persist over the next 3-4 months

Canara Robeco Asset Management (Avnish Jain, head of fixed income)

Increased maturity of our duration funds as rates are expected to remain benign in the near term as RBI OMOs are likely to support yields

Favor corporate over sovereign paper as spreads are attractive

Investors are likely to get superior risk-adjusted returns from high-quality corporate bonds, recommend they look at short- and medium-duration corporate bond funds

First Published: Fri, February 15 2019. 10:02 IST