Overheating Sign Seen in Biggest India Bond Flows in 6 Yearsby
‘Don’t see the momentum in inflows sustaining’: Peerless Funds
Consumer prices rise in July at the fastest pace in two years
The biggest flows into Indian bond mutual funds in six years are adding to overheating signs that are turning some investors cautious.
Fixed-income plans took in 439.1 billion rupees ($6.6 billion) in July, the most since April 2010, data from the Association of Mutual Funds in India show. The inflows came as a global bond rally, improved liquidity in India’s banking system and strong monsoon rains spurred the best monthly advance in benchmark sovereign notes since May 2013.
Peerless Funds Management Co. and DBS Bank Ltd. are skeptical about further gains as the 10-year yield slumped last week to its lowest level since Sept. 2009. Technical indicators have been sending signals that the notes will correct for the past month and the yield is now 30 basis points below the median midyear forecast of analysts surveyed by Bloomberg for the quarter.
“I don’t see the momentum in inflows sustaining,” said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds, which oversees 9.3 billion rupees. “For bond investors, it’s a good time to be there, but if an investor comes in right now expecting risk-rewards that we have seen in the past, it’s not going to pan out. It’s prudent to assume that most of the party is over.”
The 10-year yield slid seven basis points last week, with its close of 7.08 percent Thursday being the lowest in seven years. Bonds advanced as outgoing Reserve Bank of India Governor Raghuram Rajan announced more open-market debt purchases. The yield was steady at 7.10 percent in Mumbai on Tuesday even as official figures after the close of markets on Friday showed consumer prices jumped a faster-than-estimated 6.07 percent in July from a year earlier.
Wholesale prices rose 3.55 percent from a year earlier, after increasing 1.62 percent in June, according to separate data released on Tuesday. Indian markets were shut Monday for Independence Day.
Foreign holdings of Indian government and corporate debt declined by a combined 14 billion rupees in the last two weeks, as an imminent change in leadership at India’s central bank, accelerating inflation and the prospect of a 2016 increase in U.S. interest rates cloud the outlook for investors. The hoard had climbed in each of the previous five weeks.
India’s is among debt markets benefiting from the global hunt for yield this year as dovish policies from policy makers in Japan to the U.K. fuel appetite for emerging-market assets. Despite falling 28 basis points last month and 66 basis points since the start of 2016, the 10-year yield in Asia’s third-largest economy is still the highest among major regional markets. BlackRock Inc. and HSBC Global Asset Management are among investors that have said over the past month that they are bullish on Indian sovereign securities.
“Most of” the decline in Indian yields “came on the back of the rally in developed-market bonds post the Brexit,” DBS Bank analysts led by David Carbon wrote in an Aug. 11 report. “Investors are likely to demand higher yields to hold Indian bonds. Brexit jitters have blown over and the market is coming to terms that monetary-policy easing is near limits for the Bank of Japan and the ECB.”
July’s inflows into fixed-income funds were the biggest since April 2010. The 10-year yield had jumped 23 basis points that month even as the plans lured 1.8 trillion rupees. It fell 52 basis points over the next two months while investors withdrew 1.7 trillion rupees.
Speculation that the new central bank governor will be more aggressive in cutting interest rates has further fueled the bond rally. For ICICI Securities Primary Dealership Ltd., a unit of India’s largest private lender, those bets are based on “faulty logic and wishful thinking.”
Rajan on Aug. 9 kept the benchmark repurchase rate at a five-year low of 6.50 percent and flagged upward risks to the RBI’s inflation target of 5 percent by March 2017. July’s CPI reading was the highest since August 2014.
“We think that the rally in the bond market – with the 10-year yield seemingly poised to breach 7 percent - is close to petering out,” ICICI Securities economists led by Prasanna Ananthasubramanian wrote in an Aug. 10 report. “While the magnitude of reversal is difficult to predict, 10-year yield below 7 percent in the face of inflation between 5 and 6 percent sounds like poor compensation and therefore irrational to us.”