Fundview: Risk-reward favours India's three- to five-year corp bonds, UTI AMC's Mittal says

UTI Asset Management

14/02/2024 09:51

By Dharamraj Dhutia
       MUMBAI, Feb 14 (Reuters) - India's three- to five-year
corporate bonds are at attractive levels for investors to enter
as the risk-reward is currently favourable in terms of capital
gains as well as interest accrual benefits, the fixed income
head of UTI Asset Management said.
    "If you look at the three-year to five-year corporate bond
yield curve, especially papers from state-run companies, from a
risk-reward perspective, assuming 50-75 bps (basis points) of
(domestic) rate cuts, it could lead to significant capital
gains," Anurag Mittal said on Wednesday.
    "The starting point is also very attractive from an accrual
point of view so even if the rate cuts get delayed due to some
factors, the investor is still benefiting from the accrual
point, and could see handsome MTM (mark-to-market) gains when
rate cycle changes," he said. 
    The fund house manages debt of around 278 billion rupees
($3.35 billion). 
    Yields on AAA-rated corporate bonds with three- to five-year
maturities are in the 7.70%-7.90% range, according to LSEG. 
    The Indian corporate bond yield curve has stayed inverted
since the past one year, which makes short-term debt more
attractive. The latest example is a 10-year bond issue by Indian
Railway Finance Corp that was sold at a 7.48% coupon, while the
five-year bond yield was around 10 bps higher.
    "We are recommending moderate duration with a one-year plus
horizon," Mittal said. 
    He added that the yield curve inversion is far deeper in
corporate bonds and even as compared to historical spreads, the
two- to three-year corporate bonds are at quite an attractive
spread over the central bank policy rate, which stands at 6.50%.
    "Assuming liquidity improves and rate cuts happen, the
shorter-end should perform and curve could steepen. We are
seeing more inflows in moderate duration corporate bond funds
and these should continue."
    He expects the Reserve Bank of India to cut rates by only
50-75 bps in its easing cycle starting in the financial year
beginning on April 1.
    "Assuming stable inflation and favorable demand-supply
dynamics, the benchmark bond yield should be around 6.80%-7.00%
(in the medium term), assuming a terminal repo rate of 6.00% by
end of 2024," Mittal added. 
         
($1 = 83.0719 Indian rupees)

 (Reporting by Dharamraj Dhutia; Editing by Sonia Cheema)
 ((Dharamraj.Dhutia@thomsonreuters.com;))