Longer Bonds in India Win Investor Love as Yield Curve Steepens

A steepening yield curve is luring fund managers in India to add longer-tenor sovereign bonds as they bet that the country’s central bank will keep the yields in check.

Nippon Life India Asset Management Ltd. is loading up on 7-14 year debt, moving up from the 4-6 year notes, while IDFC Asset Management Ltd. is buying into the 9-14 year segment, fund managers at the companies said. DSP Investment Managers Pvt. is adding securities in the 9-13 year segment, according to its fund manager.

The excess cash sloshing around in India’s banking system has triggered a rally in shorter bonds, with treasury bills trading below the Reserve Bank of India’s reverse repo rate. By comparison, the longer yields have eased less as traders remain wary about the government’s record borrowing program amid chances of further slippage in the fiscal deficit.

Yields on the five-year sovereign bond have fallen about 61 basis points in the past two months, while the 14-year debt are down by only 22 basis points.

“We are more convinced now about demand-supply being managed effectively than at the beginning of the fiscal year,” said Amit Tripathi, who oversees 903 billion rupees ($12 billion) in debt plans at Nippon Life. “The steepness in the curve, the need for carry and potential open-market operations will make investors shift from the short-end.”

‘Well Anchored’

While the administration raised its borrowing target by more than a half to 12 trillion rupees for the year that began April 1, yields have fallen after a cut in the policy rate and liquidity boost by the central bank.

The benchmark 10-year yield is at 5.83%, lower from levels just before the borrowing was bumped up on May 8, though the gap between shorter- and longer-bonds is still wide by historic standards.

“The longest end of the government bond curve, as well as state bond yields, seem fairly well anchored, thereby showing strong investor interest,” said Suyash Choudhary, head of fixed income at IDFC Asset Management. This also provides some valuation protection in 9-14 year segment as yields there may not move materially higher as longest end is anchored, he said.

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