ICICI Prudential Asset Management Co. is reducing sovereign debt holdings in its higher-yield dynamic bond fund, Manish Banthia, chief investment officer for fixed income, said in an interview. Instead, it is putting money into investment grade corporate bonds with maturities between one and three years and certificates of deposit.
“As many companies have deleveraged, the risk in non-financial corporate bonds is quite low, making this segment attractive from a risk-return perspective,” Banthia said. “In contrast, sovereign bond markets appear overvalued and offer limited returns over the medium term.”
His views come at a time when some of his peers are debating whether India’s long-term bonds are becoming too popular because of index-linked capital inflows and betting that the central bank will cut interest rates. At the same time, demand for Indian assets is prompting companies to raise money through debt markets and initial public offerings rather than bank loans as better rates sweeten the deal for them. That keeps debt loads and credit risk manageable for companies.
The ICICI Prudential All Seasons Bond Fund, which Banthia has helped manage since 2012, is the best performer in its segment over a 10-year period, according to data from the Association of Mutual Funds of India. The fund reduced its sovereign bond holdings to 55.6% in July, from 61.1% in April, according to its latest fact sheet. Corporate debt holdings rose to 33.5%, from 28.9%, over the period. The tide is turning for higher-yielding assets globally, as the Federal Reserve appears set to cut rates in September. That has led to global money rushing into Asian bonds this year, with foreign investors pouring nearly $13 billion into Indian debt, according to data compiled by Bloomberg. The country’s sovereign debt is among the best performers in Asia this year so far. The rally has recently stalled, hovering around a closely watched 6.85% threshold. The 10-year bond traded in a narrow range on Friday. “The current market momentum is driven by favorable supply and demand dynamics. However, valuations in fixed-income markets look expensive and present more risk than return,” Banthia said. “While momentum-based investing may look attractive, we remain cautious at this point.”
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