A customer counts Indian one-hundred rupee banknotes before depositing them in India. (Photographer: Dhiraj Singh/Bloomberg)

What Bond Fund Managers in India are Buying Amid Uncertainties

(Bloomberg) -- An escalating trade war and an inflation-targeting Reserve Bank of India is pushing local money managers into safer and shorter debt securities.

Here’s what they said about their strategies:

Buy the Three-Year Segment

Mirae Asset Management (Mahendra Jajoo, head of India fixed-income)

  • “The three-year segment is the most attractive for the simple reason that beyond that there are still a lot of challenges and uncertainties
  • “If you are to operate in an environment where you think that the macros are fairly challenging and uncertain, but perhaps have stopped worsening, how do you capture that scenario? If things get worse from here, then you’re not panicking too much because at the end of three years you’ll get your capital back.”

Go Defensive

Kotak Asset Management (Lakshmi Iyer, chief investment officer for debt)

  • “Make portfolio defensive as there are a lot of uncertainty over policy decisions and macros. By defensive, I mean short duration -- buying two-three year sovereign bond.
  • “Short-end of curve offers the maximum comfort at this point. The delta risk to take for longer-term maturities is not commensurate with the available yield”
    • Iyer said she prefers state bonds of same duration over sovereign and AAA bonds

Shorter-Maturing Liabilities

SBI Mutual Funds (Rajeev Radhakrishnan, head of fixed income)

  • “With the rates only expected to go up in the next seven to eight months, would be fairly conservative in position across duration, liquidity
  • “Credit spreads -- corporate yields versus govt bonds-- are tight and may remain so in the very near term due to demand-supply issues.”
    • The fund’s portfolio is skewed toward shorter-maturity AAA and AA note, he said
  • “Additional policy action is clearly on the cards. There may be two more rate hikes as per current pricing followed by a longish pause after that.”

Liquidity is Key

IDFC Asset Management (Suyash Choudhury, head of fixed income)

  • “Focus on sovereign and AAA is razor sharp this year as doesn’t want illiquidity risk
  • “Moved to quality paper as much as possible. We want to be as much AAA as possible.
    • Cut exposure to some of the lower-rated bonds in some of the portfolios this year amid fears of refinancing shocks
  • “Government bond yield curve is very steep till five years and then very flat.”
    • Sees relative value in the front-end of the yield curve -- largely 4-6 govt bonds, which is core overweight holding

Accrual, Liquid Funds

Essel Finance (Killol Pandya, head of fixed income)

  • Stay at the shortest possible end of the duration curve: accrual, liquid funds, conservative ultra short-term funds
  • Fund cut duration in September-October. Haven’t added it yet
  • “Hope people continue to move to liquid funds else they will burn their fingers.”

Top Corporate Paper

Axis Asset Management (R Sivakumar, head of fixed income)

  • Prefers short-end bonds below 5-year tenor in the sovereign and corporate space as they offer more value. Favors AAA-rated paper over sovereign bonds
  • Sees a more hawkish RBI and a fair number of rate hikes going ahead
  • Doesn’t see any further significant selloff in sovereign bonds with markets being much more neutral

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