DSP BlackRock sells India sovereign bonds, favours corporates
Mumbai: BlackRock Inc.’s Indian joint venture is selling the nation’s sovereign bonds, citing accelerating inflation and the prospect of a swelling fiscal deficit.
The benchmark 10-year yield climbed to the highest since May this month as the Reserve Bank of India (RBI) said in its policy statement momentum is building in the prices of some items. The central bank also warned of the risk of “fiscal slippages,” fuelling speculation the government will need to issue more debt. Bonds are heading for their first back-to-back monthly loss since 2015.
“We have reduced our inventory of government bonds in October, especially post the RBI policy, which shows we are not very constructive in terms of taking duration risk as yields adjust to upcoming supply,” Pankaj Sharma, head of fixed income at DSP BlackRock Investment Managers Pvt, said last week. The company is overweight corporate bonds due in two to three years, he said.
India’s 10-year yields may rise to as high as 6.90% by December as the government’s funding needs push up the bond supply and the central bank sells more securities to drain liquidity, Mumbai-based Sharma said. The yield on the 6.79% bond due in May 2027 was little changed Monday at 6.73%.
India’s fiscal deficit for April to August has already reached 96.1% of the target for the whole of the financial year, data showed last month. While the government stuck to its fiscal year 2018 borrowing plan, it isn’t ruling out additional debt sales.
“I am going to be cautious on government bonds,” DSP BlackRock’s Sharma said. “I am hoping the government is going to do what they are saying in terms of staying on the deficit path and there are no idiosyncratic risks that come out. In addition to a very large government borrowing plan, we have huge state bond sales, that’s a big risk.”
India’s benchmark bonds have handed investors a loss of 0.2% this month, following a 0.4 decline in September, according to the Bloomberg Indian Government Bond 10-Year Total Return Index. They have still returned 2.6% this year.
DSP BlackRock is less pessimistic about the nation’s shorter-maturity government debt, said Saurabh Bhatia, vice-president of fixed income in Mumbai.
“We try to stay away from segments which are predominantly heavy on supply from the sovereign side,” Bhatia said. “The government typically borrows heavily in the belly of the curve. We are more bullish on the accrual part, which is three to five years, and not so much on the duration part as yields adjust to bunched up supply.’’
While the asset manager is concerned about increased spending, it believes the government will stick to its fiscal deficit target of 3.2% of gross domestic product in the year to March.
“Over the last four years the government has hardly migrated or done any missteps on the macro-economic front,” Bhatia said. “They have hard earned this macro-economic stability over the last three-to-four years, so we don’t expect a dilution in the fiscal stance.’’
DSP BlackRock’s favourite trade is in shorter-maturity corporate debt, which may benefit as companies switch to bank borrowing and sell fewer bonds, Bhatia said.
“Prospects of lowering bank lending rates allows an alternative to corporate bond issuers,” he said. “This can alter the extent of corporate bond supply in the shorter end of the curve—three-to-five-years—allowing lower credit spreads to sustain in the near term.” Bloomberg
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