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

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)