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MUMBAI – Bandhan Asset Management has taken the unique stop of investing in 30-year Indian government bonds due to the structural reduction in the risk profile of domestic fixed income and the fund house’s plan to cut reinvestment risks, its fixed income head said.

“Instead of locking away at around 7% for the next 10 years, it is better to lock away for 30 years,” said Suyash Choudhury, who oversees debt assets worth around 900 billion rupees ($10.86 billion).

The fund house has invested in these bonds since December in its actively managed schemes, whose AUM is around 40 billion rupees, contradicting the convention of leaving such long-duration paper to insurance companies and pension funds.

Since Dec. 1, India’s 30-year bond yield has fallen 36 basis points to 7.14%, while the 10-year benchmark bond yield has dropped 22 bps to 7.06%.

“We are overweight on 30-year bonds and greater than 85% of those (active) schemes are invested in 30-year bonds. The view got strongly reaffirmed after the quantum of fiscal consolidation in budget.”

The three large macroeconomic parameters to assess a country’s risk — current account deficit, fiscal deficit and inflation — are progressing favourably, largely driven by government and monetary policies, Choudhury said.

Moreover, the fund manager added, as policy continuation progresses, India is transcending from a high-risk to a low-risk emerging market, which should lead to the re-rating of risk assets.

He also said the 30-year state debt yields are easing below the 10-year yields, an inversion that could play out even in central government bonds.

“If more investors start to believe that this is a structural trade, they may be willing to pay a premium to lock away their funds for 30 years and that is the point when the curve could get inverted.”

Choudhury also highlighted that reinvestment is a major risk as rates could be significantly lower over the next two to three years and suggested investors look at increasing the weighted average maturity of their portfolios.

“Investors must take into consideration that reinvestment risk is for real and to the extent the mandate allows, should go long on duration.” ($1 = 82.8990 Indian rupees)

  • Published On Mar 15, 2024 at 06:20 PM IST

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