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Short-tenor bonds are in demand in India, thanks to rising expectations for more interest-rate cuts.
This weeks data showing further easing in inflation has raised the odds of the central bank adding to last weeks cut as early as April just when investors including HDFC Standard Life Insurance Co. are concerned that the looming supply of sovereign debt will push up long-end yields.
The bond demand-supply dynamics are likely to deteriorate going ahead, negating a big move down in long-term yields, said Puneet Pal, deputy head for fixed income at DHFL Pramerica Asset Managers Pvt. The fund favours maturities of less than or equal to four years, he said.
Worries about the supply overhang emerged after the Modi administration announced a record ₹7.1-trillion borrowing programme on Febraury 1. The debt sale is in addition to states selling more paper to fund slippages from farm-loan waivers.
The yield on the benchmark 10-year bonds, for instance, is up five basis points this month. In comparison, the five- and three-year yields have fallen at least 22 basis points in the period.
The other uncertainty plaguing investors is how proactive the Reserve Bank of India (RBI) will be in extending its bond purchases. HSBC Holding Plc estimates the RBI may buy between 1.8 trillion to 2 trillion rupees of debt in the year starting April 1, versus the 2.7 trillion rupees it likely spent so far this fiscal.
The market is concerned about the quantum and pace of bond purchases for the next year, said Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset Management Co. That’s the reason why were not seeing as enthused a rally, especially in the 10-year benchmark.
Cash Crunch
Concerns about liquidity continue to linger months after defaults by an infrastructure lender pushed up borrowing costs for businesses. With liquidity typically turning tight with the April-March fiscal year nearing an end, another credit event -- should it occur -- will worsen the crunch, investors said. Thats another reason driving them to shorter and liquid papers.
The crisis that began after the IL&FS default in September is not over yet, said Pankaj Pathak, fixed-income manager at Quantum Asset Management Co. The widening of spreads between corporate and sovereign yields reflects lack of confidence in the credit market.
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