Funds Load Up on Ultra-Long Bonds in India as Spreads Soar

(Bloomberg) -- India’s unexpected pivot away from interest rate cuts is pushing some local debt funds to buy ultra-long bonds. 

The Reserve Bank of India surprised the market earlier this month by slashing interest rates by a bigger-than-expected 50 basis points but it also changed its policy stance to neutral, a sign that its cycle of interest-rate cuts may have come to an end. 

As a result, the gap between the yields available on India’s 10-year and 30-year sovereign bonds widened to 77 basis points, around its highest level since 2021, according to data compiled by Bloomberg. That’s encouraging funds to opt for the longer-maturity notes, in a bet they have room to outperform. 

“Now is the time to think in terms of policy reversal, when and how it may occur,” said Manish Banthia, chief investment officer of fixed-income at ICICI Prudential Asset Management Co, whose fund is buying both short-dated and ultra-long bonds. “It becomes important to selectively position across the curve.” 

The growing interest in ultra-long bonds means there are now bulls at both extremes of the curve: A campaign of liquidity injections by the Reserve Bank of India has encouraged many investors to pile into the country’s shortest-maturity bonds, a bet that paid off over the last two months as yields tumbled. 

The two-pronged approach is a response to the country’s shifting monetary policy landscape, which has sent mixed signals to investors. 

The RBI followed up the change in its monetary policy stance by halting cash infusions through daily operations. Those moves — alongside reports suggesting it may act to lift money market rates — led to a selloff in bonds last week. RBI Governor Sanjay Malhotra later clarified that the central bank may have space for further policy easing if inflation undershoots its projections, but bond investors aren’t convinced. 

The market has likely priced-in the end of interest rate cuts, said Sneha Pandey, fixed income fund manager at Quantum Asset Management Co. She said long-duration bonds could now stabilize or rise in price.

The yield on the 30-year bond has climbed more than 20 basis points since the start of June, while the 10-year bond yield has barely moved.

The 30-year bond is more attractive than the 10-year note in part because so much more is already discounted in the yield, said Amit Somani, deputy head for fixed-income at Tata Asset Management Pvt. Although short-dated paper is highly sensitive to changes in interest rate expectations, longer-term bonds often reflect a broader view of a country’s economy.

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