MUMBAI, Oct 12 (Reuters) – Indian mutual funds are set to sell more government bonds after offloading $4.5 billion since July, four fund managers said, as the central bank’s policy shift raised expectations of a longer, steeper rate-tightening cycle.
The Reserve Bank of India raised rates for the first time in nearly four years and signalled further increases as inflation rises.
Mutual funds have reduced their exposure to longer-dated government bonds as rate expectations have changed, said Mansi Sajeja, a fixed-income fund manager at SBI Mutual Fund.Asset managers sold a net 51 billion rupees ($527.08 million) of government bonds in the three sessions after the rate increase, adding to sales of 378 billion rupees in July-September.
Indian mutual funds continue selling government debt as interest rate view pivots
“The policy tone sounded more cautionary on inflation generalization than growth outlook, giving it a hawkish tilt,” Amit Somani, a deputy head of fixed income at Tata Asset Management said.
Somani expects long-term bond yields to rise to a range of 7.20%-7.40%.
The five-year bond yield topped 7.05%, rising by almost 70 basis points in two months, while the 10-year bond yield was close to 7.35% levels, highest in nearly three years.”Several factors, including global rate hikes, multi-decade high global bond yields, expectations of an earlier-than-anticipated domestic rate-hike cycle, and continued uncertainty in energy markets, prompted mutual funds to reduce duration risk by trimming government bond exposure,” said Vikas Garg, head of fixed income at Invesco Mutual Fund.
Heavy open market sale of bonds by the RBI and risks of a repeat of such operations have also altered demand-supply dynamics, fund managers said.
The RBI sold bonds worth 1 trillion rupees last month, notching its highest net sale for any financial year in over a decade.
SHIFT TO SHORT-TERM ASSETS
While selling long duration government bonds, mutual funds are moving to ultra-short duration assets across government and corporate debt.
Axis Mutual Fund now prefers one-year to three-year high-quality corporate bonds, where favourable carry, ample liquidity and limited issuance of banks’ certificates of deposit create an appealing opportunity, the fund house said in a note.It may look to tactically add duration only when rate-hiking cycle progresses and yields become more attractive.
Aditya Birla Sun Life AMC likes the ultra-short term debt while Bandhan Asset Management has slashed its weighted average bond duration to less than a year, from around 12 years, the fund houses said in recent interviews with Reuters.
($1 = 95.9500 Indian rupees)
Reporting by Dharamraj Dhutia and Khushi Malhotra; Editing by Nivedita Bhattacharjee
