Short-Tenor India Bonds in Hot Demand as Rate-Cut Bets Abate

  • Belly of the yield curve is a ‘sweet spot,’ Kotak’s Iyer says
  • Nomura prefers bonds maturing in three-to-seven years

Demand for India’s shorter-maturity bonds is rising as traders bet the central bank is almost finished cutting interest rates.

Sovereign securities due in less than a decade are being snapped up as the Reserve Bank of India is seen lowering benchmark borrowing costs just once more at best, according to a Bloomberg survey of 20 fixed-income money managers and dealers. Nomura Holdings Inc. prefers bonds maturing in three-to-seven years, while Standard Chartered Plc is recommending a long position in six-year notes.

“We expect the mid-end -- the belly of the curve -- to do well relatively,” said Lakshmi Iyer, Mumbai-based chief investment officer for debt at Kotak Mahindra Asset Management Co. “This is a sweet spot, with lower rates and comfortable liquidity.”

Shorter-duration bonds are outperforming since the RBI’s rate-deciding panel reduced its key repurchase rate to 6 percent last week, and maintained a neutral policy stance while saying it will watch incoming data. The five-year yield has dropped seven basis points since Aug. 1, the day before the central bank’s decision, to 6.47 percent, while the three-year rate has fallen 11 basis points to 6.34 percent. The 10-year yield is up three basis points in the period to 6.47 percent. The trend is likely to continue, traders say.

“The game is toward the shorter end of the curve because liquidity is there,” said Anoop Verma, vice president for treasury at DCB Bank Ltd. in Mumbai. “With not too many rate cuts expected in the future, it’s all the more prudent to be invested there.”

Not everybody is shunning longer-tenor bonds. The Reliance Group has boosted the duration of its debt portfolio, moving about 70 billion rupees ($1.1 billion) from short-term funds to income funds at some of India’s top asset managers, people with direct knowledge of the matter said this week.

The switch by the group that comprises Reliance Industries Ltd., India’s most valuable company, follows the RBI’s decision, and is predicated on the expectation that the central bank will cut interest rates further, the people said, asking not to be identified as they aren’t authorized to speak on the matter.

RespondentsBond Maturities Preferred
Rate Call10-Year Yield Forecast
(For end-2017)
20Up to 10-year: 17
10-15 Year: 1
Above 30-year: 2
25bps cut: 12
No cut: 8
Median: 6.35%
Maximum: 6.60%
Minimum: 6%

Strong foreign flows into Indian bonds and stocks have contributed to ensuring ample cash availability in the financial system. Local banks had about 2.9 trillion rupees in surplus funds as of Aug. 8, according to the Bloomberg Intelligence India Banking Liquidity Index.

The excess funds are likely to support buying even in illiquid bonds, according to Avnish Jain, head of fixed income at Canara Robeco Asset Management Co. in Mumbai. Securities with maturities between 2023-2026 and 2029-2034, where the spread over liquid notes seems high, are likely to outperform in the near term, he said.

Another factor leading to the preference for shorter debt is the government’s borrowing program, where most of the supply is concentrated in longer maturities.

“The sharp increase in the supply of domestic bonds due to” the government’s debt sales and the central bank’s open-market operations will “not allow bond yields to drop significantly from the current levels,” said Shailendra Jhinghan, chief executive at Mumbai-based ICICI Securities Primary Dealership Ltd., one of India’s biggest bond houses.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE