Fundview: Indian govt debt preferable to corp bonds, given narrow spread -IDFC AMC's Kaul

Housing and Urban Development

11/11/2022 06:54

By Dharamraj Dhutia
       MUMBAI, Nov 11 (Reuters) - The supply of Indian
corporate bonds could rise going ahead, but their narrow spread
with government bond yields currently makes them a comparatively
unattractive investment, a fund manager from IDFC Asset
Management Co said on Friday.
    "We believe that while the absolute levels offer value, the
current narrow spreads still favour government bonds vis-à-vis
corporate bonds," said Gautam Kaul, senior fund manager, fixed
income at IDFC AMC.
    "Corporate bonds will become more attractive once the spread
is closer to long-term averages."
    Historically, the spread between AAA-rated corporate bond
yields and government bond yields has been in a range of 70
basis points (bps) to 80 bps. But that has turned nearly flat in
the last few weeks as government bond yields tumbled.
    Still, if investors want to go for corporate bonds, then the
three- to five-year part of the curve offers the most value
currently, Kaul said.
    The supply of corporate papers has been lower so far this
year as the Reserve Bank of India's aggressive interest rate
hikes sent yields rocketing in the initial part of the year.
    Kaul expects supply to rise down the line as economic
activity has returned.
    "It is reasonable to assume that the trend in higher credit
demand should start reflecting in the corporate bond supply as
well."
    Typically, corporates have to pay higher rates than the
government to compensate for the greater perceived risk. But
top-rated companies have been enjoying a much lower spread than
historical standards of late, which makes such debt a less
rewarding and riskier bet.
    For example, AAA-rated state-run Housing and Urban
Development Corp  HUDC.NS  issued more-than-three-year bonds at
a 7.54% coupon earlier this week.
    In comparison, the benchmark three-year government bond
yield  IN3YT=RR  ended at 7.42% on a semi-annual basis on
Thursday.
    Government bond yields crashed on Friday, dropping by 10-15
bps across the curve and tracking a similar move in U.S. yields
after inflation in the world's largest economy eased in October.
    Cooling inflationary could lead the Federal Reserve to go
slow on rate hikes, which could prompt the RBI to follow suit.
    Kaul expects the RBI's policy repo rate to top out in the
6.25%-6.50% zone, after a hike of 25 bps to 35 bps in December.
 (Reporting by Dharamraj Dhutia; Editing by Savio D'Souza)
 ((Dharamraj.dhutia@tr.com))