Indian debt funds set to extend $4.5 billion bond selloff after RBI policy shift

Indian mutual funds are set to sell more government bonds after offloading $4.5 billion since ​July, four fund managers said, as the central bank's policy shift raised ‌expectations of a longer, steeper rate-tightening cycle.

The Reserve Bank of ​India raised rates for the first time in nearly ⁠four years and signalled further increases as inflation rises.

Mutual funds have reduced their exposure to longer-dated government bonds as rate expectations have changed, said Mansi Sajeja, a ‌fixed-income fund manager at SBI Mutual Fund.

Asset managers sold a net ₹51 billion ($527.08 million) of government bonds ‌in the three sessions after the rate increase, adding to sales ‌of ⁠₹378 billion in July-September.

"The policy tone sounded more ⁠cautionary on inflation generalisation than growth outlook, giving it a hawkish tilt," Amit Somani, a deputy head of fixed income at Tata Asset Management said.

Mr. Somani expects long-term bond yields ​to rise to a ‌range of 7.20%-7.40%.

The five-year bond yield topped 7.05%, rising by almost 70 basis points in two months, while the 10-year bond yield was close to 7.35% levels, highest in nearly three years.

"Several factors, ‌including global rate hikes, multi-decade high global bond yields, expectations ​of an earlier-than-anticipated domestic rate-hike cycle, and continued uncertainty in energy markets, prompted mutual funds to reduce duration risk by ⁠trimming government bond exposure," said Vikas Garg, head of fixed income at Invesco Mutual Fund.

Heavy open market sale of bonds by the RBI ‌and risks of a repeat of such operations have also altered demand-supply dynamics, fund managers said.

The RBI sold bonds worth ₹1 trillion last month, notching its highest net sale for any financial year in over a decade.

SHIFT TO SHORT-TERM ASSETS

While selling long duration government bonds, mutual funds are moving to ultra-short duration assets across government ‌and corporate debt.

Axis Mutual Fund now prefers one-year to three-year high-quality corporate bonds, where ​favourable carry, ample liquidity and limited issuance of banks' certificates of deposit create an appealing opportunity, the fund house said ⁠in a note.

It may look to tactically add duration only when ⁠rate-hiking cycle progresses and yields become more attractive.

Aditya Birla Sun Life AMC likes the ultra-short term debt while Bandhan Asset ‌Management has slashed its weighted average bond duration to less than a year, from around 12 years, the fund houses said in ​recent interviews with Reuters.