(April 22): Some Indian fund managers are buying longer-term government bonds, saying these are less sensitive to global volatility driven by the Iran conflict.
DSP Asset Managers Pvt and Tata Asset Management Pvt are among those preferring the 30-year-plus tenors over the more widely traded five-year and 10-year papers. They are also being drawn by a tightening supply, growing demand and a rising yield premium over policy rates.
“We do not prefer the five- and 10-year segments of government bonds because domestic drivers have less impact compared to Iran-related news, which we have no certainty about,” said Sandeep Yadav, head of fixed income at DSP Asset. “In long bonds, domestic demand-supply drivers have more influence.”
The US-Iran conflict has dragged on for several weeks now and while a fragile ceasefire is in place, uncertainty over its outcome continues to keep crude prices volatile. At the same time, demand-supply dynamics are again turning favourable for longer bonds, with the monetary authority cutting down on the supply of the 30-year-plus segment. That coincides with a re-emergence of bond demand from insurers as well as pension funds, who have met their equity obligations.
Rising yield premiums are also luring funds to longer bonds to lock in higher returns. The spread between the 30-year government debt and RBI’s policy repo rate widened to 257 basis points earlier this month, the highest in more than three years. It stood at 225 basis points on Wednesday.
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The Reserve Bank of India kept rates unchanged in its April policy but struck a cautious tone, citing risks to its inflation and growth outlook from the duration of the Middle East conflict.
“The entire yield curve is very steep,” said Akhil Mittal, senior fund manager at Tata Asset Management. “We don’t expect policy to turn hawkish. Once the Iran war subsides, there can be a sharp fall in yields.”
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