Bloomberg News

Top Funds See Yields at One-Year Lows on Rate Cuts: India Credit

January 06, 2012

Jan. 4 (Bloomberg) -- Yields on India’s sovereign bonds will drop to a one-year low by March, the nation’s top- performing debt-fund managers predict, after the central bank signaled it would cut borrowing costs as inflation cools.

The yield on the government’s benchmark 10-year note will slide 37 basis points to 8 percent, according to Tata Mutual Fund and Peerless Mutual Fund, both based in Mumbai. Tata Mutual’s bond fund returned 13.04 percent in 2011, the most among 521 fixed-income plans tracked by Bloomberg and almost double the average gain of all funds. Investors in Peerless Mutual earned 12.96 percent, the second-best performance.

Reserve Bank of India Governor Duvvuri Subbarao, who raised borrowing costs seven times last year, said he expects a “reversal” of monetary tightening in 2012 as inflation and growth slow, according to an interview posted on the British Broadcasting Corp.’s website on Jan. 2. Rupee-denominated government notes gained 6.5 percent in the past year, compared with 6.4 percent in China, 5.8 percent in Russia and 16.9 percent in Brazil, JPMorgan Chase & Co. indexes show.

“The outlook for bonds will be good as inflation is coming down and investors expect a series of rate cuts,” Murthy Nagarajan, the Mumbai-based head of fixed income at Tata Mutual that oversees $4.2 billion, said in an interview on Jan. 2. “We are running long positions in all our funds.”

Wholesale Prices

The 521 debt funds tracked by Bloomberg returned 6.76 percent on average last year, compared with a loss of 22 percent in the nation’s 495 equity funds. Commodity funds earned 24 percent as gold prices gained for an 11th consecutive year.

Tata Mutual’s top performing Fixed Income Portfolio Fund Scheme C3 bought securities maturing in less than 270 days on signs Asia’s third-biggest economy is slowing. Industrial output shrank 5.1 percent in October from a year earlier, the first contraction since June 2009, government data showed last month. Wholesale prices, which the central bank uses to guide monetary policy, rose 9.11 percent in November, the least in a year.

“We have acknowledged that growth is going to be a concern,” Subbarao told the BBC. “We could expect a reversal of monetary tightening, but it’s difficult to say when that will take place and in what shape it will roll out.”

Alpana Killawala, a Mumbai-based spokeswoman for the Reserve Bank, directed Bloomberg to a policy statement issued on Dec. 16, when Subbarao underlined risks to economic growth.

Bonds Rally

Yields on debt due in 12 months slid 30 basis points, or 0.30 percentage point, in December to 8.47 percent, while those on securities due in 10 years fell 17 basis points, on speculation the Reserve Bank will cut the benchmark repurchase rate when it meets on Jan. 24.

The yield on the 8.79 percent note due in November 2021 rose one basis point to 8.37 percent today, according to the central bank’s trading system.

The outcome of this month’s policy review may be influenced by wholesale-price data for December due on Jan. 13, according to Peerless Mutual.

“If inflation decelerates below 8 percent in December, the central bank will have leeway to cut interest rates,” Ganti N. Murthy, the Mumbai-based head of fixed-income at Peerless Mutual that oversees about $1.1 billion, said in an interview on Jan. 2. “These are good levels to buy government notes as there can be rate cuts ahead.”

Debt Sales

Increases in wholesale prices will be “close to” 6 percent by March, Murthy predicts, spurring the Reserve Bank to cut the repo rate by as much as 50 basis points in 2012.

The government’s announcement last week that it would sell 8.5 percent more debt than planned in the year ending March will weigh on bonds, according to Mumbai-based Canara Robeco Asset Management Ltd. The finance ministry will borrow a record 5.1 trillion rupees in the current financial year, the central bank said Dec. 30, raising the bond-sale target for a second time in three months.

“Yields will inch up as there will be no let-up in borrowings,” Ritesh Jain, the Mumbai-based head of investment at Canara Robeco, which oversees about $1.3 billion, said in an interview on Jan. 2. “In the current environment, it will be very difficult for the government to hold down its borrowings.”

Ten-year note yields may range from 8.40 percent to 8.80 percent in 2012, Jain said. Canara Robeco’s InDigo Fund, which wasn’t included in the ranking because it also invests in gold, returned 14.6 percent last year.

Fund Holdings

India’s higher yields are attracting global investors. International investors bought $3.9 billion more of India’s bonds than they sold last month, taking their ownership to $26.1 billion, according to exchange data. They increased holdings by $8.4 billion in 2011 as a declining currency made the debt cheaper.

As their holdings rose, the difference in yields between the nation’s debt due in a decade and similar-maturity U.S. Treasuries shrank to 640 basis points today from a record 697 basis points reached Nov. 9.

The rupee lost 16 percent last year, the worst performance among Asia’s most-traded currencies, according to data compiled by Bloomberg. It advanced 0.1 percent to 53.17 per dollar today.

The cost of credit protection on State Bank of India using credit-default swaps was 395 basis points yesterday, seven basis points higher than a week earlier, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Some investors consider the lender a proxy for the nation.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

State Bank of Bikaner & Jaipur, a unit of the nation’s largest commercial bank, forecasts the central bank will cut the repo rate by 25 basis points to 8.25 percent on Jan. 24.

“Cooling inflation and slowing growth may prompt the central bank to reverse its rate-tightening cycle soon,” R.S. Chauhan, the Mumbai-based chief dealer of treasury at State Bank of Bikaner & Jaipur, said in an interview yesterday. “That expectation will help bonds to rally further.”

The 10-year yield may drop to 8 percent by March, he said.

--Editors: Ven Ram, Sandy Hendry

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net


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