LIC Mutual Fund trims long-term bond holdings as rate-cut rally ends
LIC Mutual Fund is lowering maturities across debt schemes and investing in up to five-year notes, as India's rate cut-led bond market rally is largely over, chief investment officer at the asset manager said on Thursday.
ADVERTISEMENT Earlier this month, India's central bank slashed its key policy rate by a larger-than-expected 50 basis points, but also changed its policy stance to "neutral", leading to expectation that the rate-cutting cycle is coming to a close.
"We are trimming duration across schemes. The big part of the rally is over and with the current geopolitical scenario we have to be a bit cautious," Marzban Irani, whose fund house manages debt worth 220 billion rupees ($2.6 billion), said in an interview.
Irani, however, does not rule out one more India rate cut as the Federal Reserve should also ease rates later in the year. The fund manager is not very bullish on India's 10-year government bond, which he says should trade in a range of 6.15% to 6.30% over the medium-term against 6.26% on Thursday. The 10-year yield fell nearly 50 basis points after India's first rate cut in February through June 6, when the central bank surprised with the change in stance. Since then, it has risen 4 basis points.
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Prateek Shroff, a fund manager at LIC Mutual Fund, said that bank-issued one-year certificates of deposit are trading at 6.40%-6.50%, "a very good accrual" over the policy repo rate of 5.50%.
"When the market is in passive mode, the shorter-end will continue to remain in demand," Shroff said.
ADVERTISEMENT Shroff also expects one more rate cut this year, probably in October or December. Short-term bond yields should remain contained despite the central bank's announcement of an operation to withdraw cash from the banking system, the fund managers said.
ADVERTISEMENT "Yields can harden 5-10 bps on the shorter end because of this but then the market will settle down," Shroff said.
LIC Mutual Fund is also comfortable with corporate bonds of two-to-three years due to their attractive returns over overnight funding rates, according to Shroff. ($1 = 85.8070 Indian rupees)
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