Indian govt bonds a better bet than corporate debt: Kotak Life's Bhatt
The benchmark 7.26% 2032 bond yield ended at 7.4510% on Wednesday. The AAA-rated Refinitiv benchmark rate was at 7.70%. Meanwhile, state-run REC reissued February 2033 bonds at a yield of 7.67%.
PremiumMUMBAI : Indian government debt is likely to remain a more attractive investment proposition than corporate debt as tight spreads do not justify the risks for the latter, a senior executive at Kotak Life Insurance told Reuters on Wednesday.
"Given the tight credit spreads, the sovereign curve looks better placed," said Churchil Bhatt, executive vice president of debt investments at the insurance firm, whose portfolio is worth around 400 billion rupees ($4.85 billion).
"The credit premium that is currently being priced in by markets is due to a reduction in corporate bond supply over the last couple of years. At current spreads, I would be selective on credit and prefer sovereign bonds simply because the kicker is very limited for moving away from sovereign safety."
The benchmark 7.26% 2032 bond yield ended at 7.4510% on Wednesday. The AAA-rated Refinitiv benchmark rate was at 7.70%. Meanwhile, state-run REC reissued February 2033 bonds at a yield of 7.67%.
Bhatt said corporate bond supply has fallen from pre-COVID levels, while government debt supply has risen sharply.
And so, "The spread has compressed because of the nature of change in demand-supply dynamics of the two yield curves."
Yield curve seen steeping
Bhatt expects the benchmark government bond yield to trade in the 7.25%-7.75% band over the medium term, and the yield curve to steepen.
"The market will be tested on the supply-demand front gradually. The yield curve has flattened materially, and I expect the curve to give back some of the flatness," he said.
"Going forward, the curve may steepen a bit for maturities longer than 10 years as supply-demand dynamics begin to take hold."
"The shorter end of the curve, or the five-year part, would be relatively more stable in comparison, as adequate rate action is priced in."
The five-year 7.38% 2027 bond yield ended at 7.3775%, while the 30- and 40-year yields were around 7.55%.
State debt supply to rise
Bhatt also expects the supply of debt from Indian states to increase compared with the first half of this fiscal year.
"State debt supply has underwhelmed market expectations over the last one year, but most of the reasons (for that) are not likely to repeat themselves," he said.
Indian states borrowed only around 2.76 trillion rupees from April to September, 70% of the scheduled 4 trillion rupees. They aim to raise 2.53 trillion rupees from now through December.
"A supply deviation of 10% from the indicative calendar may be considered a norm, but a deviation more than that is an exception," he said.
"I expect the rest of FY23 to be the norm, and not the exception, when it comes to SDL supply." (1 = 82.4125 Indian rupees)
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This story has been published from a wire agency feed without modifications to the text.
