Why Funds Managers Love Indian Bondsby
Favorite destination for fixed-income investments: PineBridge
Ten-year yield to drop to 7.40 percent by end-2016: survey
Rupee sovereign bonds, Asia’s best performers for two years in a row, are still the top pick for some global funds.
Plunging oil prices, a stable currency and limited exposure to China are keeping investors bullish, with Pacific Investment Management Co. calling Indian notes the “preferred” local-currency securities in the region. The yield on benchmark 10-year debt in Asia’s third-largest economy will drop for a third straight year, the longest stretch since 2003, a Bloomberg survey of 10 fixed-income dealers and fund managers shows.
“We are overweight Indian bonds,” said Luke Spajic, Singapore-based portfolio manager for emerging markets at Pimco, which oversees $1.5 trillion in assets globally. “They offer high carry and the Indian economy has shown resilience in the face of global growth slowing. If we see dislocation and weakness, unrelated to local influences, we will most likely look to add.”
Rupee debt returned 8.1 percent last year and 16.5 percent in 2014, Bloomberg Indexes tracking major Asian markets show, as sliding Brent crude prices improved public finances for India, a net oil importer. They also helped slow gains in consumer prices, paving the way for the steepest interest-rate cuts in six years in 2015. Local 10-year notes pay 549 basis points over similar-maturity U.S. Treasuries, even after the Federal Reserve raised borrowing costs in December.
Inflation risks are to the downside and the Reserve Bank of India “will use the space for further accommodation, when available,” Governor Raghuram Rajan said last month, signaling he is not yet done cutting rates. The monetary authority, which next reviews borrowing costs on Feb. 2, is prepared to act outside of scheduled policy meetings if warranted, he said.
Rajan, who cut the benchmark repurchase rate by 125 basis points last year, will lower it another 25 basis points in 2016 to 6.50 percent, according to the median estimate in a Bloomberg survey of economists published last month. Barclays Plc, which in a Dec. 17 report said Indian government bonds are its top pick in Asia, sees a reduction to 6.25 percent.
“India is our favorite destination for fixed income investments in Asia for the moment, with very attractive yields on a risk-adjusted basis,” said Anders Faergemann, senior sovereign portfolio manager for emerging-markets fixed income in London at PineBridge Investments, which oversees $77.6 billion globally. “It appears to be facing the global headwinds better in comparison to other emerging-market peers, is not too dependent on exports and also has quite limited trade linkages with China.”
Investor optimism is also spurred by narrowing currency swings and India’s move to relax curbs on overseas investment in its debt. Global funds got access to an additional 165 billion rupees ($2.5 billion) of sovereign and state-government bonds from Jan. 1, part of a September plan to allow a phased increase in ownership limits. Foreign holdings of rupee notes increased by 505 billion rupees last year after surging 1.67 trillion rupees in 2014.
The rupee’s one-month implied volatility, a measure used to price options, slumped 109 basis points in December, the most in seven months, to 5.61 percent. It plunged 459 basis points in the last two years. Investing in rupees earned 2.7 percent, including interest, in the past 12 months, the most in Asia, data compiled by Bloomberg show.
Aberdeen Asset Management Plc, which is overweight Indian and Indonesian bonds, says a deviation from the government’s fiscal consolidation path is a risk, a view echoed by PineBridge.
A proposed increase in pay for millions of civil servants, coupled with higher pensions for military personnel, have sparked concern that Prime Minister Narendra Modi’s administration will struggle to meet its budget-deficit targets and borrow more to bridge the shortfall. The government may have to reassess its fiscal projections for the year starting April 1, the Finance Ministry said in a mid-year review published Dec. 18.
Even so, the yield on India’s 10-year sovereign notes will fall to 7.40 percent by end-2016, according to the median estimate in the survey of fixed-income traders and asset managers. The rate, which slipped 10 basis points in 2015 after sliding 97 points in 2014, fell one basis point to 7.72 percent in Mumbai on Monday. It is still the highest in Asia after Indonesia.
“We like Indian bonds due to attractive carry and potential for capital appreciation due to more rate cuts,” said Edwin Gutierrez, who helps oversee $13 billion as the head of emerging-market sovereign debt at Aberdeen in London. “They allow us to sleep better.”