- Yield on 15-year sovereign notes has dropped 27 basis points
- Quarter-point RBI rate cut more or less priced in, fund says
The Indian venture of the world’s largest money manager is buying longer-dated debt as bonds extend a rally triggered by the government’s fiscal restraint and signs the central bank will cut interest rates.
“We are reallocating more money in the 10-15 year segment of the government bond yield curve which is liquid and offers potential price appreciation,” said Dhawal Dalal, Mumbai-based head of fixed income at DSP BlackRock Investment Managers Pvt., which oversees 392 billion rupees ($5.8 billion). “There’s been a marked improvement in sentiment since the budget and with global markets stabilizing, market participants expect the Reserve Bank of India to reduce the repurchase rate further.”
Notes due in more than a decade are the best performers among different maturities of rupee-denominated debt this month, after lagging in the past year, indexes compiled by Bloomberg show. The 15-year yield has slumped 27 basis points since Feb. 26 as Prime Minister Narendra Modi’s government stuck to its goal to narrow the fiscal deficit to a nine-year low, putting the securities on course for their first monthly gain since September.
Bets that RBI Governor Raghuram Rajan will add to 2015’s four rate cuts were boosted further after data Monday showed consumer prices rose in February at the slowest pace in four months. Longer bonds are also outperforming as a seasonal cash squeeze keeps short-term rates elevated while prompting the RBI to pump in funds through open-market purchases of notes.
The yield on benchmark 10-year notes has fallen 20 basis points from Feb. 26, including a 16-basis point slide on Feb. 29 when Finance Minister Arun Jaitley retained the government’s target of narrowing the fiscal gap to 3.5 percent of gross domestic product in the year ending March 2017. The two-year yield has dropped 9 basis points in the period. Jaitley announced gross borrowings of 6 trillion rupees for the period, which will be a record.
“We believe market participants are likely to focus on the demand-supply dynamics in the new fiscal year and it’s likely impact on the yield curve,” said Dalal. While it is an important issue, investors “are willing to overlook it and take part in the relief rally. The 10-15 year segment has a higher relative value and is likely to do well in the medium term,” he said.
Dalal said in an interview in December that he was selling longer-dated sovereign bonds amid the prospect of faster inflation and higher U.S. interest rates. The DSP BlackRock Government Securities Fund managed by him has returned 1.6 percent in three months, beating 88 percent of its peers, data compiled by Bloomberg show.
Rupee sovereign bonds with maturities beyond 10 years have delivered a total return of 1.1 percent so far in March, compared with 0.5 percent for notes due between seven and 10 years. Debt due between one and three years has returned 0.3 percent and so has that maturing between five and seven years. That contrasts with the performance over the past one year in which the 5.9 percent earned by investors on securities due after a decade is the smallest return across those terms.
Not all funds are as bullish. UTI Asset Management Co.’s Sudhir Agrawal says he has been putting more money into shorter-maturity bonds and only accelerated that shift after the budget. He expects increased debt issuance from the central and state governments to put upward pressure on yields.
Bond sales by Indian states have been rising over the years, with Tata Asset Management Co. estimating their gross borrowings at 3 trillion rupees in the current fiscal year, more than double the 1.2 trillion rupees for the 12 months ended March 2010. The figures for the year starting April 1 are yet to be disclosed.
“There is also no clarity on how much state supply will be seen next year,” said Agrawal, a fund manager at UTI Asset, which oversees 1.06 trillion rupees as India’s fifth-biggest money manager. “At present, we prefer sticking to the short-end of the curve where we are seeing less supply.”
The benchmark 10-year bond yield capped a fourth day of declines on Tuesday, the longest falling streak since July, and was little changed at 7.58 percent in Mumbai on Wednesday. Even so, it has dropped just 20 basis points in the past year despite 2015’s repo rate cuts of 125 basis points.
“A high 10-year yield has prevented banks from cutting lending rates further” despite the RBI’s easing, Bank of America Merrill Lynch economists wrote in a report Wednesday, adding that the RBI should set a schedule for its open-market bond purchases as it seeks to tackle the seasonal cash crunch in the financial system.
Consumer prices rose 5.18 percent in February from a year earlier, official data showed on Monday. Rajan said over the weekend the RBI was “comforted” by the budget while telling reporters to "wait and see" how that feeds into monetary policy. His last move was in September.
“We feel the RBI may have a larger room to reduce interest rates,” said R. Sivakumar, Mumbai-based head of fixed income at Axis Asset Management Co., which oversees about 346 billion rupees. “We are still maintaining duration in our portfolio and feel that much of the negativity with regard to supply has been priced in by the market. Our largest holding is in the 10-15 year segment.”