Goldman Sees Long India Yields Rising as Short Bonds Favored

  • Increased debt supply, limited rate-cut room to hit long bonds
  • SBI Funds, IDFC Asset bullish on notes maturing within 5 years

Indian bonds with shorter maturities are finding favor with money managers and strategists alike on optimism a banking system awash with cash will help keep short-term rates in check.

SBI Funds Management Pvt., a unit of India’s largest lender, and IDFC Asset Management Co. are turning bullish on securities maturing within five years, just as an impending increase in debt supply and limited room for interest-rate cuts cloud the outlook for longer-dated notes. As the government starts borrowing in the financial year starting April 1 amid waning foreign demand for local notes, Goldman Sachs Group Inc. is estimating an over-supply of 511 billion rupees ($7.5 billion) of sovereign bonds in the period.

“We would want to restrict to the short end of the curve as a rally will be biased toward the short end,” said Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds, which oversees 1.3 trillion rupees. “Ten-year bonds are fairly valued at current levels and the yield is more or less factoring in just one more policy rate cut.’’

A 175-basis point reduction in the repurchase rate over two years to 6.25 percent has left the Reserve Bank of India with less ammunition to ease further. The benchmark will drop by just 25 basis points more in 2017, according to the median estimate in a Bloomberg survey.

Gross market borrowing by Prime Minister Narendra Modi’s administration is seen surging to a record 6.8 trillion rupees in the financial year starting April 1, according to estimates by Citigroup Inc. The “supply overhang” of government bonds could cause the belly (5-year) and long-end (10-year) of the curve to “creep higher,” Goldman Sachs analysts including Vishal Vaibhaw wrote in a report last week.

Shifting Demand

“As further rate cuts become less likely, we expect investors to shift from duration to carry-based strategies, which should effectively shift bond demand from the longer end to the shorter,” Nomura Holdings Inc. strategists including Vivek Rajpal wrote in a Jan. 19 research note. “We recommend a neutral stance for the longer end of the bond yield curve and suggest a buy-on-dip approach in the front end.”

India’s benchmark 10-year yield dropped 125 basis points last year, its third straight annual decline and the biggest since 2008. The yield, at 6.43 percent on Wednesday, is seen ending 2017 at the same level, according to the median estimate in a Bloomberg survey of analysts. The two-year yield slipped 114 basis points in 2016, while that on five-year notes slid 112 basis points.

Nomura’s Rajpal predicts the 10-year yield to rise to 6.60 percent by end-2017, widening its spread over the two-year yield to about 50 basis points. The gap is 13 basis points currently.

“Over the next year, you’ll see a reasonable steepening of the yield curve where the shorter end gets anchored to the liquidity and low-deposit rate scenario, whereas the longer end responds more to the lack of rate cuts and higher bond supply,’’ said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset, which oversees 569 billion rupees.

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