Mutual Funds Continue Selling Treasuries Despite U.S. Trade Deal Relief: Report

Indian mutual funds are likely to continue selling government bonds after record sales in January as supply-demand dynamics outweigh optimism over US trade deals for debt investors, five fund managers said. Funds sold net bonds worth 290 billion rupees ($3.2 billion) in January, the most on record, followed by 53 billion rupees on Monday, clearing house data showed.

Mutual funds are the seventh-largest holders of Indian government bonds, selling more than 10% of their total holdings of 2.81 trillion rupees last month, according to ICRA Analytics, amid a supply glut and bets that the central bank’s rate-cutting cycle is nearing an end.
“While the rate announcement has created positive market sentiment, supply and demand challenges persist as no buyback announcement was included in the budget, while gross loans remained high,” Basant Bafna, senior fixed income fund manager at Mirae Asset, said on Monday.

Bafna said he prefers corporate bonds in the 1- to 3-year range and certificates of deposit as spreads remain attractive compared to historical averages.

India’s 10-year government bond yields rose 7 basis points after Sunday’s budget, which included record market borrowing. Yields were up 11 basis points last month, while yields on short-term securities rose about 3 to 7 basis points.

The central and state governments are likely to borrow a gross amount of over Rs 30 trillion in the next financial year from April, an increase of over 10%, further adding to supply problems. Some fund managers said only a big liquidity injection from the Reserve Bank of India could lead to a turnaround. No rate cut is expected on Friday, but the market is likely to look for new liquidity measures, said Avnish Jain, fixed income CIO at Canara Robeco Asset Management. The RBI may continue to announce bond purchases to plug liquidity gaps in the banking system.

TRANSITION TO BUSINESS ASSOCIATIONS

Mutual funds are moving away from government bonds and instead investing in shorter-term corporate bonds, bank-issued debt and higher-interest government bonds.

Funds prefer corporate bonds with a maturity of two to four years as the focus shifts from mark-to-market gains to accrual-based strategies, said Anurag Mittal, senior executive vice president and head of fixed income at UTI AMC.

An accrual-based investment strategy refers to stable interest income from holding debt, rather than trading for profit.

Mittal also said he is “constructive” on government debt as local governments tend to borrow less in the first half of a financial year.

($1 = 90.4070 Indian Rupees)