Bond fund managers remain split on long-duration bets amid easing headwinds

Wide variance in gilt, dynamic funds' duration positioning in recent past

Gilt and dynamic bond funds — the two debt fund categories with the highest duration flexibility — are taking sharply divergent calls in recent months, with some managers remaining defensive while others are making aggressive duration bets despite rate-hike risks.

 

Gilt-fund portfolios reveal the extent of the divergence.

 

Among the large schemes, Bandhan Gilt Fund has the most aggressive stance, with an average maturity of 32.2 years in May. It is followed by ICICI Prudential Gilt Fund (21.6 years), Nippon India Gilt Fund (21.3 years) and HDFC Gilt Fund (21.2 years).

 

At the other end, SBI Gilt Fund maintained a relatively defensive posture with an average maturity of 10.1 years, while Kotak Gilt Fund stood at 13.1 years.

 

A similar story is playing out in the dynamic bond category. Bandhan Dynamic Bond Fund raised its average maturity sharply to 21.3 years in May from just over two years at the start of the year.

 

HDFC Dynamic Bond Fund also remained positioned at the longer end, with an average maturity of 19.7 years. In contrast, Nippon India Dynamic Bond Fund maintained a much shorter maturity profile at 4.1 years, while SBI Dynamic Bond Fund remained relatively cautious at 5.4 years.

 

Even as duration positioning varied widely, most large schemes moved in the same direction in May, extending portfolio maturity ahead of the Reserve Bank of India (RBI) policy review and foreign portfolio investor (FPI) tax changes.

 

The average maturity across the six large gilt funds rose to 19.9 years in May from 17.3 years in April, while four of the six schemes increased portfolio maturity during the month.

 

Among the six large dynamic bond funds, the average maturity increased to 12.8 years from 10.8 years, with five schemes extending duration.

 

The RBI and government measures announced on June 5, along with the US-Iran truce, have eased some headwinds faced by longer-duration bonds.

 

Bond yields have softened across the curve over the past two weeks, with longer-dated securities benefiting the most.

 

“The RBI’s steps to attract capital flows should ease pressure on the currency and these measures should address multiple concerns in one go. They should improve capital flows, stabilise the currency, shore up forex reserves, improve system liquidity, moderate the credit-deposit ratio for banks, and result in money market and corporate bond yields drifting lower,” HDFC MF said in its June factsheet.

 

However, most fund managers continue to prefer shorter-duration papers over longer-dated securities.

 

“Until there is greater clarity on the inflation trajectory, shorter-duration strategies may offer a more prudent way to navigate the evolving macro landscape,” SBI MF said in its latest monthly outlook.