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India Funds Hunt for Spreads, Liquidity as Credit Woes Mount

Subhadip Sircar
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India Funds Hunt for Spreads, Liquidity as Credit Woes Mount

(Bloomberg) -- The massive gyrations in the global bond markets and the ongoing credit crisis in India are forcing money managers to seek liquidity in government bonds even as they eye top-rated corporate paper trading at high spreads to the sovereigns.

Tata Asset Management Ltd., Canara Robeco Asset Management Co. and Edelweiss Asset Management Ltd. are preferring top-rated paper issued by state-run firms as the spreads over similar-tenor sovereign remain attractive. The view on what sovereign bonds to buy remains more diverse with Canara Robeco favoring the short-end, while Edelweiss likes the 10-year plus segment.

The spread of three-year AAA-corporate paper over a similar tenor government bond stood at 106 basis points on Thursday after widening to 109 basis points a day earlier, the highest since October, Bloomberg data showed. The gap for the 10-year company debt was at 118 basis points, the highest since mid-November.

Reserve Bank of India Governor Shaktikanta Das desisted from a rate cut on Monday, but signaled all policy steps are open for consideration. Markets are now factoring in at least 25 basis points of cuts at the April 3 review, as the bailout of the nation’s fourth biggest private lender and the write-off of the bank’s bonds have roiled credit markets already.

“Most of the fund managers are fully invested as there is expectation of rate cuts due to slowing growth,” said Murthy Nagarajan, head of fixed income at Tata Asset Management in Mumbai, who expects another 75 basis points of cuts in the coming months.

Following are recommendations from some key asset managers:

Tata Asset Management

Bullish on the 6- and 13-year segment of the sovereign yield curve due to the spread available over respective benchmarksAAA state-companies’ bonds are giving a spread of 70 to 100 basis points over govt bonds of different maturities. Prefer these high-quality bonds over sovereigns as the supply of government debt will increase from next fiscal year and top-rated state firms’ bond supply may taper offAdvice investors to take a risk-averse view on credit to avoid any negative surprise

DSP Investment Managers

Continues to prefer 7 – 13 year segment on the sovereign curve, says Saurabh Bhatia, head of fixed incomeSays fair amount of steepness between 5- and 8 year segment and the longer end; 13 year segment is trading relatively flat to 30 year segmentThis kind of risk-off scenario calls for a portfolio reflecting higher amount of sovereign bondsShortest state-run bonds will find favor compared to longer end of the corporate bond curve

Canara Robeco Asset

Prefer short end of the curve as it is likely to react more on rate cuts, says Avnish Jain, head of fixed incomeHigh quality corporate bonds are a better option as spreads over sovereign are attractive. However, from a liquidity perspective sovereign bonds are much better

Edelweiss Asset

Yields on 1-5 year bonds have eased significantly since RBI provided longer-term cheap money which has caused relative under-performance in 10-year and longer-dated bonds, according to Dhawal Dalal, head of fixed incomeFinds value in 10-year plus govt bonds at current levels based on the current shape of the sovereign yield curve amid prospects of a rate cut in the near term and surplus liquidity in the banking systemAt current levels, prefer AAA-rated corporate bonds issued by state-run firms over sovereign

Quantum Asset

Maintaining neutral duration position in dynamic bond fund, says Pankaj Pathak, head of fixed incomeThere are too many moving parts. On one hand there is a hope that the RBI will join the global league with deeper rate cuts and monetary support to tackle the impact of coronavirus. While on the other hand Indian Rupee and bonds are susceptible of FPI selling in case the global risk off sentiments persist.

(Updates with spread levels)

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