AgenciesMUMBAI: The rising spread between Indian shorter-tenor corporate bonds and government debt is likely to offer attractive entry points for investors in the current quarter, said Murthy Nagarajan, head of fixed income investments at Tata Asset Management.
"We are currently underweight on corporate bonds and overweight on government bonds. We may slowly start shifting to corporate debt," said Nagarajan.
"The spread between government bonds and corporate bonds is likely to increase in the January-March quarter, as the supply of the latter may rise. A spread of around 60 basis points (bps) can be a good entry point in corporate bonds."
Yields of AAA-rated, three- to five-year corporate bonds are in a range of 7.55%-7.58%, while their government counterparts are offering a return of 7.02%-7.12% on a semi-annual basis.
Indian banks are expected to actively raise funds via debt markets in the January-March quarter, while state-run firms have plans to raise as much as 340 billion rupees ($4.18 billion) over the next couple of weeks.
Even though Nagarajan recommends shifting to corporate debt, he suggests avoiding longer-duration bonds as the spread in that part of the curve is unattractive.
The spread between the 10-year benchmark bond and the similar tenor AAA-rated corporate bond is around 20 bps on an annualised basis.
"Demand from long-term institutional investors and lower supply may be some of the reasons why spreads are not widening," he said.
Nagarajan expects the yield curve to steepen in 2023 from the current flattish trend, due to higher supply on the longer end.
He expects the government to borrow 15.50-16 trillion rupees on a gross basis and aim to lower the fiscal deficit to 5.8% of GDP.
He also expects the Reserve Bank of India (RBI) to hike the repo rate one last time in February and says rate cuts, if any, would happen only in 2024. A majority of the market participants see a 25 bps hike next month.
In 2022, the RBI raised repo rate by 225 bps to 6.25%.
Nagarajan also recommends short-term bond funds, banking and PSU funds, which could provide better returns in the current market.
"We are currently underweight on corporate bonds and overweight on government bonds. We may slowly start shifting to corporate debt," said Nagarajan.
"The spread between government bonds and corporate bonds is likely to increase in the January-March quarter, as the supply of the latter may rise. A spread of around 60 basis points (bps) can be a good entry point in corporate bonds."
Yields of AAA-rated, three- to five-year corporate bonds are in a range of 7.55%-7.58%, while their government counterparts are offering a return of 7.02%-7.12% on a semi-annual basis.
Indian banks are expected to actively raise funds via debt markets in the January-March quarter, while state-run firms have plans to raise as much as 340 billion rupees ($4.18 billion) over the next couple of weeks.
Even though Nagarajan recommends shifting to corporate debt, he suggests avoiding longer-duration bonds as the spread in that part of the curve is unattractive.
The spread between the 10-year benchmark bond and the similar tenor AAA-rated corporate bond is around 20 bps on an annualised basis.
"Demand from long-term institutional investors and lower supply may be some of the reasons why spreads are not widening," he said.
Nagarajan expects the yield curve to steepen in 2023 from the current flattish trend, due to higher supply on the longer end.
He expects the government to borrow 15.50-16 trillion rupees on a gross basis and aim to lower the fiscal deficit to 5.8% of GDP.
He also expects the Reserve Bank of India (RBI) to hike the repo rate one last time in February and says rate cuts, if any, would happen only in 2024. A majority of the market participants see a 25 bps hike next month.
In 2022, the RBI raised repo rate by 225 bps to 6.25%.
Nagarajan also recommends short-term bond funds, banking and PSU funds, which could provide better returns in the current market.
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