Bond fund managers in India are loading up on relatively shorter maturity bonds as they bet that the monetary authority will keep interest rates at current levels for long and any rate cut cycle will be shallow.
(Bloomberg) — Bond fund managers in India are loading up on relatively shorter maturity bonds as they bet that the monetary authority will keep interest rates at current levels for long and any rate cut cycle will be shallow.
Tata Asset Management Pvt. Ltd. is looking at buying 3-5 year bonds to benefit from interest earning on coupon payments, while Bandhan Asset Management Ltd. is looking at adding securities in the 3-6 year segment, according to top officials at the fund management houses. Shorter tenure securities offer better returns than longer ones if the benchmark rates are on hold or if the cuts are shallow. Besides, traders don’t get compensated for the risk of adding duration.
India’s central bank surprised markets by keeping rates on hold earlier this month, belying expectations of a last move in the current hiking cycle. While Reserve Bank of India Governor Shaktikanta Das was at pains to point out that the April pause was a hold and not a pivot, traders expect the cycle’s end.
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Aditya Birla Sun Life AMC Ltd. said a pause in rates could extend all through 2024 while Bandhan Asset’s head of fixed-income Suyash Choudhary sees cuts coming through only towards early next year.
These views are reflected in yields too.
Yields on 5-year bonds have eased by 12 basis points to 7.02% while that on 10-year paper have come off by 10 basis points since the April 6 policy.
The RBI has raised its key rate by 250 basis points in the current cycle to quell inflation. Adding to the tightening introduced into money markets via the Standing Deposit Facility, which has been acting as a new floor above the reverse repo rate, the total increases work out to 290 basis points.
What the market is expecting is the RBI may delay rate cuts for as long as possible because of the dis-inflationary process, said Murthy Nagarajan, head of fixed income at Tata Asset Management. “There will only be token rate cuts, 25 basis points or 50 basis points. The point is you need to have a view that inflation will head toward 4% levels.”
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