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Contrarian Indian Bond Trader Changes Sides as Call Pays Off

Kartik Goyal and Anto Antony
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Contrarian Indian Bond Trader Changes Sides as Call Pays Off

(Bloomberg) -- Kamal Mahajan is going contrarian again on Indian bonds. His last call, a big short, helped Bank of Baroda turn a profit when others were caught up in the worst rout in two decades.This time, he’s advancing the case that the Reserve Bank of India will add to its three interest-rate cuts, prolonging a bond rally as Prime Minister Narendra Modi keeps inflation in check. While the consensus forecast is for the 10-year yield to rise toward 7.35% by year end, he expects it to drop to 6.5%.“We are sensing a tectonic shift in policymaking in the sense that the government is planning income distribution and economic growth through lower interest rates,” the head of treasury at India’s second-biggest state bank said in an interview. “With growth remaining decent and inflation low, the 10-year yields are heading lower slowly and we don’t see a reversal in yields.”Underlying Mahajan’s call, backed by the $36 billion of funds his team manages, is the conviction that a re-elected Modi will keep to budget deficit targets, allaying concerns that more borrowings will be required to fund measures helping farmers and the poor. The nation’s sovereign bonds posted their best monthly gain in May since 2016.The yield of the benchmark 10-year bond fell to a 20-month low in June. Still, some investors doubt the rally will continue given that Modi plans to offer farmers 870 billion rupees ($12.5 billion) of handouts annually, and is planning to guarantee crop prices. Others are also worried that there’s a delay in the transfer of surplus funds by the central bank to the government, which may affect the budget.Mahajan argues that the government has a good fiscal and inflation track record. Inflation has dropped to 3.05% from the 11.5% high seen in 2013 before Modi’s first term, while the budget deficit fell to 3.4% of gross domestic product for the fiscal year ended in March from 4.8% in 2013.Too Eager“What we find now is that banks are too eager to book profits or exit positions,’’ said Mahajan, who started working at Bank of Baroda in 1984. “We are maintaining our positions, and we’ll not panic and sell if yields go 10-to-20 basis points lower from here.”The 10-year bond yield rose three basis points to 6.88% on Tuesday.Read: A Bond-Trading Secret That Helped One Indian Bank Beat Its PeersBack in 2016 when Mahajan’s trading rivals were buying sovereign debt, his desk began selling longer-dated bonds on the bet that the RBI will hike rates. When the central bank turned hawkish in 2018, state lenders lost as much as 300 billion rupee on their debt holdings, while Bank Baroda turned in a trading profit of 14.5 billion rupees.This time, the 60-year-old started going long in September 2018 after the 10-year yield soared past 8% to touch a four-year high, convinced that inflation had peaked. He bought debt with average maturity of up to five years.As the price of oil, crucial for Asia’s second-biggest crude importer, slipped and the economy slowed, the RBI cut rates three times and signaled that it will adopt policies to support growth. Consumer prices are around one percentage point below the central bank’s medium-term target of 4%.‘When oil started inching up and touched around $75, we were of the view that the rise in oil is because of artificial elements,” Mahajan said. “We came to conclusion that it won’t go beyond $90 as the U.S. is no longer the biggest consumer of oil. They are producing oil and exporting. That changes the entire dynamics of oil markets.”Oil prices traded under $65 per barrel on Tuesday, down from almost $87 a barrel in October 2018. To be sure, if crude prices rise to $70 again, and inflation climbs to 4%, then India’s bond yields will start climbing, he said.For now, Mahajan is thankful he’s got the yield curve right again.“The key thing is whether you were lucky enough to ride the yield curve or not,” he said. “If you are already so long that when yields go up, you just look at your losses. It’s all about riding the yield curve.’’(Updates with Tuesday’s trading.)To contact the reporters on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net;Anto Antony in Mumbai at aantony1@bloomberg.netTo contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Liau Y-SingFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- Kamal Mahajan is going contrarian again on Indian bonds. His last call, a big short, helped Bank of Baroda turn a profit when others were caught up in the worst rout in two decades.

This time, he’s advancing the case that the Reserve Bank of India will add to its three interest-rate cuts, prolonging a bond rally as Prime Minister Narendra Modi keeps inflation in check. While the consensus forecast is for the 10-year yield to rise toward 7.35% by year end, he expects it to drop to 6.5%.

“We are sensing a tectonic shift in policymaking in the sense that the government is planning income distribution and economic growth through lower interest rates,” the head of treasury at India’s second-biggest state bank said in an interview. “With growth remaining decent and inflation low, the 10-year yields are heading lower slowly and we don’t see a reversal in yields.”

Underlying Mahajan’s call, backed by the $36 billion of funds his team manages, is the conviction that a re-elected Modi will keep to budget deficit targets, allaying concerns that more borrowings will be required to fund measures helping farmers and the poor. The nation’s sovereign bonds posted their best monthly gain in May since 2016.

The yield of the benchmark 10-year bond fell to a 20-month low in June. Still, some investors doubt the rally will continue given that Modi plans to offer farmers 870 billion rupees ($12.5 billion) of handouts annually, and is planning to guarantee crop prices. Others are also worried that there’s a delay in the transfer of surplus funds by the central bank to the government, which may affect the budget.

Mahajan argues that the government has a good fiscal and inflation track record. Inflation has dropped to 3.05% from the 11.5% high seen in 2013 before Modi’s first term, while the budget deficit fell to 3.4% of gross domestic product for the fiscal year ended in March from 4.8% in 2013.

Too Eager

“What we find now is that banks are too eager to book profits or exit positions,’’ said Mahajan, who started working at Bank of Baroda in 1984. “We are maintaining our positions, and we’ll not panic and sell if yields go 10-to-20 basis points lower from here.”

The 10-year bond yield rose three basis points to 6.88% on Tuesday.

Read: A Bond-Trading Secret That Helped One Indian Bank Beat Its Peers

Back in 2016 when Mahajan’s trading rivals were buying sovereign debt, his desk began selling longer-dated bonds on the bet that the RBI will hike rates. When the central bank turned hawkish in 2018, state lenders lost as much as 300 billion rupee on their debt holdings, while Bank Baroda turned in a trading profit of 14.5 billion rupees.

This time, the 60-year-old started going long in September 2018 after the 10-year yield soared past 8% to touch a four-year high, convinced that inflation had peaked. He bought debt with average maturity of up to five years.

As the price of oil, crucial for Asia’s second-biggest crude importer, slipped and the economy slowed, the RBI cut rates three times and signaled that it will adopt policies to support growth. Consumer prices are around one percentage point below the central bank’s medium-term target of 4%.

‘When oil started inching up and touched around $75, we were of the view that the rise in oil is because of artificial elements,” Mahajan said. “We came to conclusion that it won’t go beyond $90 as the U.S. is no longer the biggest consumer of oil. They are producing oil and exporting. That changes the entire dynamics of oil markets.”

Oil prices traded under $65 per barrel on Tuesday, down from almost $87 a barrel in October 2018. To be sure, if crude prices rise to $70 again, and inflation climbs to 4%, then India’s bond yields will start climbing, he said.

For now, Mahajan is thankful he’s got the yield curve right again.

“The key thing is whether you were lucky enough to ride the yield curve or not,” he said. “If you are already so long that when yields go up, you just look at your losses. It’s all about riding the yield curve.’’

(Updates with Tuesday’s trading.)

To contact the reporters on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net;Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Liau Y-Sing

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.