FUNDVIEW-India short-end bonds attractive as rate-hike cycle near peak –UTI MF's Agrawal

MUMBAI, Dec 26 (Reuters) - India's bond yield curve

looks attractive at the shorter end as the interest rate

tightening cycle is expected to peak soon, while heavy debt

supply in the new year could weigh on the longer end, a fund

manager with UTI Mutual Fund said on Monday. With government borrowing likely to pick up in the fiscal

year starting April, the shorter end of the curve was more

preferable, said Sudhir Agrawal, executive vice president and

fixed income fund manager at UTI Mutual Fund. "The long end of the curve is going to continue to have this

supply issue all around the year going forward, while the short

end of the curve is just a seasonal phenomenon." India's one-year bond yield was at 6.794% on

Monday, while the three-year bond yield was at

7.091%. The Reserve Bank of India has raised rates by 225 basis

points so far in the current tightening cycle and is expected to

hike rates by just another 25 basis points before it takes a

pause, as per a Reuters poll. Agrawal expects the repo rate to peak at 6.50%. The benchmark 10-year bond yield is at 7.32%,

and Agrawal sees it rising by another 15-20 basis points as he

expects the next fiscal year's budget to be expansionary. He also expects corporate bonds supply to rise next year

after falling in the last 1-1.5 years as economic activity picks

up, with issuers preferring capital market instruments to raise

funds over bank borrowings due to an increase in funding costs. A rise in bond issuances from corporates and banks in the

January-March quarter, especially in the three-month to one-year

segments, is expected to put pressure on the two- to three-year

part of the curve for a brief period, Agrawal said. The aggressive tightening by global central banks for the

better part of 2022 led to volatility in fixed income assets but

provided opportunities for fast money in other asset classes. However, the quick appreciation in the equity market and the

volatility in fixed income will reduce in 2023 as interest rates

are near their peak, Agrawal said. "I do see, globally over, say, the next 12 to 18 months,

flows probably moving more in favour of fixed income versus

equities."

(Editing by Swati Bhat and by Savio D'Souza)