A New Strategy for India’s Bond BullsBy
IDFC Asset, Tata buying more of shorter-tenor securities
Nomura favors maturities of less than or equal to five years
Longer-maturity bonds are losing their allure with money managers in India as an increasingly hawkish central bank prompts investors to roll back expectations of interest-rate cuts.
IDFC Asset Management Co. and Tata Asset Management Ltd., which oversee a combined 1.1 trillion rupees ($17 billion) in assets, have been favoring shorter-tenor debt as a pick up in inflation and the risk of fiscal slippages keep the Reserve Bank of India on hold after cutting the repurchase rate to a seven-year low. Nomura Holdings Inc. has a bias toward the front-end of the curve, with maturities of less than or equal to five years.
The shift in strategy seems to be paying off: yields on longer-dated securities are rising faster than on short-term debt. The RBI’s six-member policy panel left the benchmark rate unchanged last month, while raising its inflation forecast for the October-March period. Minutes of the Oct. 3-4 meeting released later showed one member said the central bank must be ready to tighten.
“The RBI’s commentary indicates that they are going to be on a long pause,” said Murthy Nagarajan, Mumbai-based head of fixed income at Tata Asset. “It’s better to be in the shorter-end of the curve, where you get more pick up in terms of yield. We’re are buying more in the six-to-eight year segment.”
The yield on the benchmark 10-year bonds has jumped 46 basis points since the end of July, with its close of 6.93 percent on Tuesday being the highest in six months. The notes, which were steady on Wednesday, capped a third straight monthly loss in October -- the longest run of such declines since April 2015.
In comparison, the five-year yield has risen 21 basis points since the end of July to 6.77 percent, while that on three-year bonds is up just three basis points to 6.49 percent.
Nomura is cautious on the seven-to-15 year part of the curve, according to Vivek Rajpal, a rates strategist in Singapore.
With consumer inflation rearing its head, the recent surge in oil prices to a two-year high couldn’t have come at a worse time for India, which imports a majority of its crude requirements. The nation’s current-account deficit widens by about $900 million for every dollar increase in oil prices, according to Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc in Mumbai.
Sentiment in the bond market has also been hurt by worries that the government will fail to meet its fiscal-deficit target for the financial year ending March 31, and its plan to issue special debt to recapitalize state-run lenders will crimp demand for existing debt.
“If the expectation is that there aren’t going to be any more rate cuts, and then if you look at where the absolute value is, to us the five-to-nine year sector on the government bond curve holds a lot of appeal,” said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset. “We have made adjustments to the portfolio post the October policy.”