Fundview: India's top-rated low-duration debt currently attractive - Invesco MF's Garg

Garg Furnace

24/02/2023 07:48

By Dharamraj Dhutia
       MUMBAI, Feb 24 (Reuters) - India's top-rated
low-duration corporate debt investments are likely to offer
better returns than longer-duration bonds, which must be avoided
for the time being, a fixed income official at Invesco Mutual
Fund said on Friday.
    "The spread of corporate bonds over government bonds of up
to two-year maturity are attractive and close to the historical
average," said Vikas Garg, head of fixed income at Invesco
Mutual Fund. The fund house roughly manages around 170 billion
rupees ($2.05 billion) of debt.
     "But the moment we go longer, the spread comes down to as
low as 20 basis points (bps)." 
    The AAA-rated two-year corporate bonds were yielding 7.80%,
while the entire yield curve up to the 15-year part remained
around the same levels, Refinitiv data showed. 
    One-year commercial papers of top-rated companies are now
yielding around 8%.
    "Investors should look at actively managed funds and could
invest around 70%-80% in up to two-year bonds, and the remaining
portion could be invested in money market instruments," Garg
said. 
    India's shorter-duration bond yields have risen over the
last few sessions, as the Reserve Bank of India (RBI) may raise
the repo rate further. Tight liquidity conditions are also
hurting. 
    The RBI raised the repo rate for a sixth consecutive time to
6.50% earlier this month, and kept the door open for more
tightening, spooking markets.
    "Large part of returns would be coming from accrual strategy
and not from capital gains," Garg said. 
    "India may not see a rate cut in 2023, and we may not see a
major benefit from capital gains, so investors should look at
the space that gives the best risk-reward while keeping the
duration risk under control," he further added. 
    Garg recommends that investors lock in funds in short-term
bonds currently and then increase the duration profile once rate
cut comes into the picture, around 12 months to 18 months later.
    "2024 may be a better entry point for longer-duration bonds,
with better clarity on rate cut scenario."
    He rules out any major spike in the shorter-duration yields
in near term, as markets have already factored in another rate
hike, to which Garg has only assigned a 50% probability. 
    "Market may get relief after the rate hike, with the
terminal repo rate at 6.75%. There could be a relief rally,
especially in the up to five-year space."
($1 = 82.7750 Indian rupees)
 (Reporting by Dharamraj Dhutia; Editing by Swati Bhat and
Janane Venkatraman)
 ((Dharamraj.dhutia@tr.com))