By Dharamraj Dhutia and Khushi Malhotra
MUMBAI (Reuters) – Indian mutual funds have ramped up investments in state and corporate bonds while selling federal government debt to take advantage of the rising yield differential, fund managers said.
“Mutual funds have preferred spread assets like corporate bonds and state debt over government securities, as the supply has increased, and spreads have widened with an expectation of lower supply in April-June,” said Sandeep Yadav, head of fixed income at DSP Mutual Fund.
The gap between yields on India’s state bonds and federal government bonds rose to over 50 basis points, the highest in more than a year, while that between corporate debt and federal debt jumped to as much as 90 basis points.
In the three months to March-end, there was a rush in corporate bond supply, while there was not much activity in government bonds, said Kruti Chheta, a fund manager at Mirae Asset Management.
“In order to take advantage of bond supply and lock in at attractive yields, mutual funds may have replaced government bonds with corporate bonds,” Chheta said.
During the quarter, the federal government sold 2.79 trillion rupees of notes while states raised 4.34 trillion rupees. Corporates sold more than 3 trillion rupees of debt.
Investors also piled on high-yielding bonds as policy interest rate cuts and an expected improvement in India’s banking system liquidity in the coming months could lead to a narrowing of the yield advantage.
“With positive liquidity and rate cuts, we believe along with long government bonds, the 3 to 5 year corporate bonds will also come down and state debt spreads will also see a compression,” Devang Shah, head of fixed income at Axis Mutual Fund, said.
The fund house will stay long on government bonds, but has started to switch to other options, largely corporate bonds, the fund manager said.
($1 = 85.6175 Indian rupees)
(Reporting by Dharamraj Dhutia and Khushi Malhotra; Editing by Mrigank Dhaniwala)
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