Investors should wait for budget before buying 10-year bonds: LIC Mutual Fund’s Singh

Indian fixed income investors should wait for the union budget announcement before getting into longer duration government bonds, after which the 7.40% level for the benchmark yield would be an attractive entry point, a fund manager with LIC Mutual Fund said on Friday.

The Indian Finance Minister is expected to present the country’s annual budget to the parliament on Feb.1.
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“The benchmark bond yield should trade in the 7.20%-7.40% range till March,” said Rahul Singh, vice president and senior fund manager of fixed income at LIC Mutual Fund, adding that the spread of the 10-year level with the repo rate was “attractive”.

“Once the markets start expecting rate cuts to come in, yields will start moving down. As an investor, I will be entering at these levels and not exiting,” he said.
Indian benchmark 7.26% 2032 bond yield was at 7.28%, largely unchanged for the month, after easing 17 basis points in November.

“At the current juncture I would be more interested in two year to three year corporate bond curve, and once the final rate hike and budget is done, that would be the time to be invested in the 10-year part of the curve,” Singh said.

He expects the Reserve Bank of India to go for another rate hike in February, taking the repo rate to 6.50%, to be followed by a prolonged pause.

A long pause would help investors with accrual gains, Singh said.

The RBI has hiked rate by 225 basis points in 2022, as inflation stayed above the upper tolerance level of 6% for 10 months to October.

Singh was not expecting any major negative surprise in the budget for the bond markets and was eyeing net borrowing of around 10 trillion rupees ($120.82 billion) in 2023-2024.

“By the next year, if there is possibility of rates coming down, 10-year bond makes more sense in terms of capital appreciation,” the fund manager said.

Singh also said the level of 7.40% for the 10-year bond is attractive even if there is no strong rally in bond markets for some time, while investors could also look at the five-year part of the curve for accrual gains after the budget announcement. ($1 = 82.7650 Indian rupees)

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