India's DSP favours short and ultra-long debt to manage geopolitical risk, exec says

MUMBAI: DSP Mutual Fund is turning to Indian corporate bonds with maturities of up to three years and government debt greater than 30 years to shield its portfolio from risks arising from the Iran, according to its head of fixed income.

The preference reflects a differentiated view of how exposed various parts of India’s bond yield curve are to selling pressure driven by higher crude oil prices.

India’s 10-year bond yield is has risen by 31 basis points since the U.S.-Israeli war on Iran began, pressured by a more than 50% surge in Brent crude price, a key fiscal and inflationary risk for one of the world’s largest energy importers.

While abundant liquidity provided by the central bank should continue to pull down yields on shorter-term debt, longer maturities are vulnerable to war-related shifts in market sentiment, Sandeep Yadav, head of fixed income at DSP said in an interview last week.

“The RBI has given markets a lot of comfort that it is not hawkish by any standard, which has helped rates on commercial papers, certificates of deposit and corporate bonds,” said Yadav, who oversees$7.6 billion of debt investments.

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India’s banking system liquidity surplus has averaged about 4 trillion rupees ($42.22 billion) in April, more than double the size of liquidity surplus in the month prior, helped by a pick up in government spending.

Ultra-long government bonds

Yadav sees the more frequently traded10-15 year government bonds struggling to sustain any rally, with investors reluctant to take on “duration risks” until markets are confident that a U.S.–Iran ceasefire will hold. Duration risks relate to the greater interest rate risk longer maturity bonds carry.

That’s even after RBI Governor Sanjay Malhotra said it was “quite possible” that interest rates would remain low for an extended period.

DSP’s Yadav sees better value in ultra-long government bonds, considering them less vulnerable to geopolitical swings than 10- to 15- year debt. Lower issuance of notes with ultra-long maturities will also likely drive down the spread in their yields over the 10-year benchmark, he said.

New Delhi said last month it would cut issuance of bonds with maturities of 30 to 50 years to 24.9% in April–September 2026 from 35% in the same period last year.