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FUNDVIEW-India's 5-7 year govt bonds attractive to buy – ICICI Prudential's Srinivasan

Kitco Media
By Reuters
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Reuters
By Bhakti Tambe and Dharamraj Dhutia MUMBAI, Feb 16 (Reuters) - India's five-to-seven-year government bonds look attractive for investments as they will benefit the most from an eventual reversal of monetary tightening, the head of fixed income at ICICI Prudential Life Insurance said. Yields on the shorter tenor bonds have risen of late, as market prices in more rate hikes, while banking system liquidity has slipped into a deficit, and the deficit is expected to widen further towards the end of the financial year.


"The best part of the curve right now, is the five-year to seven-year space, from a carry angle," Arun Srinivasan, senior executive vice president - head of fixed income at ICICI Prudential Life Insurance told Reuters in an interview on Thursday.


"Any potential rate cut will have an impact on this segment, and supply on the longer end is expected to continue, while this part may not see more supply," he said. The five-year to seven-year bond yields are almost at par with the 10-year, thus apart from the benefit of attractive "carry," these also offer healthy investment opportunities from a held-to-maturity perspective, Srinivasan said. Carry is the difference between the yield on a longer-maturity bond and the cost of borrowing. "In a flat curve, it is better to remain invested in this segment." The five-year 7.38% 2027 bond yield was at 7.28%, the seven-year 7.10% 2029 bond yield was at 7.32%, while the benchmark 7.26% 2032 bond yield was at 7.34%, with the curve bear flattening.


Srinivasan said he expects the yields of over 10-year bonds to rise sharply in the next financial year with elevated supply, with the benchmark bond yield trading in 7.20-7.50% range in the near term.


"I expect 15-year to 40-year government bond yields to rise in April-September and this will lead to some steepening of the curve. The spread between 10-year and 30–40-year bond yields will rise to 35-40 bps (basis points)." Srinivasan does not see another hike in the repo rate in April, in contrast to the rising bets of one more 25 bps increase. He also ruled out the possibility of any rate cuts in the next fiscal year starting April. "Interest rates are going to remain higher for longer, not only in India but also globally," he said.


Government bonds topped the order of preference, followed by state debt and then corporate bonds though longer-duration corporate papers should be avoided, he said.


"I like the three-year corporate bond space from a carry angle. I think the spread of three-year to five-year corporate bonds is very attractive. For the longer end I would prefer government bonds over corporate bonds." (Reporting by Bhakti Tambe and Dharamraj Dhutia Editing by Swati Bhat and Dhanya Ann Thoppil)

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