An Indian bond fund manager has raised concerns that the rally in the nation’s 30-year bonds has gone too far, driven by traders’ heightened expectations for policy rate cuts and increased foreign fund purchases.
The trade has become crowded as investors eager to capitalize on a paradigm shift in the nation’s rates view the 30-year debt as the best vehicle, according to Dhawal Dalal, head of fixed income at Edelweiss Asset Management Ltd., overseeing 820 billion rupees ($10 billion) of assets.
“We believe there won’t be a secular decline in India’s bond yields in the medium term,” Dalal, a 27-year market veteran, said in an interview in Mumbai as reported by Yahoo Finance. “We are yet to become a developed country where inflation remains between 2% and 3%.”
The recent inclusion of Indian bonds in JPMorgan Chase & Co.’s index has made the market a focal point for global investors, highlighting the different strategies employed by local funds to gain an advantage. While rivals such as Bandhan Asset Management have significantly increased their holdings in long bonds, Dalal urges caution due to thinner liquidity leading to volatility.
The premium that the 30-year benchmark sovereign debt has over the 10-year bond has narrowed to about five basis points recently from 100 basis points in 2020, the narrowest since March 2023.
While Dalal’s firm still has about 25% of its assets in 30-year bonds, he sees better value in the more liquid 10 to 15-year debt, allocating some 40% of assets to 10-year bonds.
The Reserve Bank of India (RBI) is expected to engage in only a “shallow rate-cutting cycle wherein they’ll probably cut one or two times” this fiscal year, Dalal said. Should that happen, the 10-year bonds may see yields decline by 25 basis points, he noted.
“We don’t know whether there’ll be a parallel shift downward or there’ll be a widening of the spread between the 10 and 30,” Dalal said. “That has to be seen.”
The RBI has kept the policy rate unchanged at 6.5% for more than a year to control inflation. While the price index has eased in recent months, it remains at 4.75%, above the central bank’s 4% target.
Despite foreign investors raising holdings of Indian sovereign bonds since JPMorgan’s announcement in September to include Indian bonds in its emerging-market index, their long-term participation remains uncertain, Dalal said. He suggested that foreign bond investors might follow the path of equities, booking profits and reinvesting when they see opportunities.
Edelweiss Government Securities Fund, with 1.48 billion rupees of assets, was among the top performers, returning 5.64% in the past six months, according to ValueResearch’s ranking of 31 funds.
“We have to be a little cognizant of all these factors before blindly building a 30-year Indian government bond portfolio,” Dalal said.
