Rate-cut fervour sees funds favouring India’s short bonds

Bloomberg

India’s shorter-maturity bonds are set to outperform as traders boost the odds the central bank may cut interest rates again as soon as its April meeting.
That’s one of the reasons asset managers such as DHFL Pramerica Asset Managers Pvt. and HDFC Standard Life Insurance Co. favor the front-end of the yield curve. At the same time, escalating concern about Prime Minister Narendra Modi’s plan to sell almost $100 billion of debt is damping the appeal of longer maturities.
“The RBI rate cut and expectations of a further reduction will support the short end,” said Puneet Pal, deputy head of fixed income at DHFL Pramerica Asset Managers Pvt. in Mumbai, who favors debt due in four years or less. Meanwhile, the “demand-supply dynamics are likely to deteriorate going ahead, negating a big move down in long-term yields.”
The odds for more rate cuts is rising as inflation slows, with Reserve Bank of India Governor Shaktikanta Das pointing to the CPI to justify a surprise 25 basis-point reduction last week. Consumer-price growth fell to 2.05% in January, well below the RBI’s medium-term target of 4 percent.
Demand for shorter-maturity bonds is also higher amid concern of a repeat of the cash crunch seen last year following the default of Infrastructure Leasing & Financial Services Ltd. With liquidity tightening anyway towards the end of the fiscal year in March, another default may create a squeeze.
Funds switching to shorter maturities has seen yields on three-year bonds slide 24 basis points this month to 6.91%, while those on five-year notes have tumbled 29 basis points. At the same time, benchmark 10-year yields have climbed eight basis points to 7.36%.
Concern about a supply overhang for longer maturities increased after Modi’s government announced a record 7.1-trillion-rupee borrowing program on February 1. The sales are in addition to states issuing more paper to fund shortfalls resulting from the waiver of some farm loans.

Adding to the uncertainty are questions over the central bank’s plans to extend bond purchases. RBI will cut back buying to between 1.8 trillion rupees to 2 trillion rupees in the year starting April, from an estimated 2.7 trillion rupees so far this fiscal year, according to HSBC Holdings Plc.
“The market is concerned about the quantum and pace of bond purchases for next year,” said Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset Management Co. in Mumbai. “That’s the reason why we’re not seeing as enthused a rally, especially in the 10-year benchmark.”