Going Long on Short Bonds Gets Boost in India from RBI Cash Move

(Bloomberg) -- Investors are set to funnel surplus money into short-term bonds, further boosting an already favored play in India’s debt market, after the central bank’s surprise decision to inject more cash into the banking system.

The Reserve Bank of India’s unexpected move to release 2.5 trillion rupees ($29 billion) starting September may prompt lenders to favor shorter-tenor securities over longer-dated ones, say investors including UTI Asset Management Co. and PGIM India Asset Management.

“If credit growth is not shaping up, the question becomes how to deploy the huge surplus liquidity,” said Nitin Agarwal, head of India trading at Australia & New Zealand Banking Group Ltd. “In such a scenario, funds will be deployed in short-end bonds.” 

India’s yield curve has been steepening this year on the back of the RBI’s sizable liquidity infusions, as short-term yields have dropped at a faster pace than their long-tenor counterparts. The trend has accelerated since Friday following the RBI’s surprise shift in stance to neutral, which dampened expectations for further easing and dimmed the appeal of longer-duration debt.  

Some investors are also looking to buy shorter-tenor company debt, citing attractive yields on such notes currently.

“We will reorient our portfolio toward corporate bonds, especially in the 3-7 years segment where we believe that spreads are attractive given the backdrop of abundant liquidity,” said Puneet Pal, head of fixed income at PGIM Asset Management.

HSBC Asset Management also favors corporate bonds in the 3-5 year range, which are offering spreads of 50-70 basis points over comparable government bonds, it said in a note. ITI Asset Management likes higher-rated bonds of state-run companies and shadow lenders. 

Still, not all are convinced that the trade has more room to run. Bandhan Asset Management, for instance, believes further gains in the shorter-dated paper could be difficult. 

“The curve should stabilize, and we could see bouts of both steepening and flattening as market participants reposition,” said Sandeep Yadav, head of fixed income at DSP Asset Managers Pvt.

Steepening Looms

For now, steepening remains a dominant theme. The spread between the 10-year and 5-year benchmark yields has widened to about 50 basis points — a three-year high. 

As the 10-year yields rose, a state-run lender Power Finance Corporation Ltd. withdrew its plan to raise funds through bonds due in July 2035, while it now plans to issue shorter bonds maturing in nearly two years and about five years, according to people familiar with the matter. 

“While long-end bonds are not necessarily overvalued, shorter-end bonds will have a clearer runway for their yields to fall,” said Nitin Agarwal at ANZ Banking Group. 

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