Indian mutual funds to continue government bond sales despite US trade deal relief, managers say
Indian mutual funds will likely continue selling government bonds, after record sales in January, as demand–supply dynamics outweigh U.S. trade-deal optimism for debt investors, according to five fund managers.
Funds net sold bonds worth 290 billion rupees ($3.2 billion) in January, the most for any month on record, followed by 53 billion rupees on Monday, clearing house data showed.
Mutual funds are the seventh-largest holders of Indian government bonds and sold more than 10% of their overall holdings of 2.81 trillion rupees last month, according to ICRA Analytics, amid a supply overhang and bets that the central bank's rate-cutting cycle is nearing an end.
"While the tariff announcement has brought forward positive market sentiment, demand-supply challenges continue to persist as there was no buyback announcement in the budget, with gross borrowings remaining elevated," Basant Bafna, head - fixed income at Mirae Asset, said on Monday.
Bafna said he prefers corporate bonds in the 1- to 3-year segment and certificate of deposits, as spreads remain attractive against historical averages.
India's benchmark 10-year bond yield jumped 7 basis points after Sunday's budget, which included a record market borrowing. The yield had jumped 11 bps last month, while rates on shorter-dated securities rose around 3-7 bps.
The central and state governments are likely to borrow a gross amount of over 30 trillion rupees in the next financial year starting April, an increase of over 10%, adding to supply woes.
Some fund managers said only a major liquidity infusion from the Reserve Bank of India could lead to a turnaround.
There is no expectation of a rate cut on Friday, but the market will likely look forward to any new measures on liquidity, Avnish Jain, fixed income CIO, Canara Robeco Asset Management said, adding the RBI may continue to announce bond purchases to ease liquidity gaps in the banking system.
MOVE TOWARDS CORPORATE BONDS
Mutual funds are moving away from government bonds and instead investing in shorter duration corporate bonds, debt issued by banks and higher-yielding state debt.
Funds prefer two- to four-year corporate bonds as the focus shifts from mark-to-market capital gains to accrual-based strategies, said Anurag Mittal, senior executive vice president & head fixed income at UTI AMC.
An accrual-based investment strategy refers to steady interest income earned from holding debt, rather than trading for gains.
Mittal also said he is "constructive" on state debt as local governments tend to borrow less in the first half of a financial year.
($1 = 90.4070 Indian rupees)
