Mutual funds have sold government bonds at a record pace in March so far, as the Iran war drove up oil prices, heightening inflation risks, pushing the rupee to record lows and prompting a broad selloff across the debt market.
This has led some asset managers to shift to short-duration corporate debt where they see greater value.
Mutual funds have net sold government bonds worth ₹35,600 crore so far this month, a record for any month, clearing house data showed.
Brent crude’s surge to near $120 per barrel has intensified inflation concerns and pushed the rupee to a record low beyond 93 per dollar, prompting investors to demand higher yields on both government and corporate bonds.
Corporate bonds have come under greater pressure than sovereign bonds, in line with broader risk-off sentiment. LSEG AAA-rated corporate bond yield with 2-5 year maturity has jumped 20-25 basis points, while its government bond counterpart is up less than 10 bps.
As corporate-government bond spreads widen, some investors see value in the former.
Corporate bonds have become “more attractive from a risk-reward perspective”, said Basant Bafna, head of fixed income at Mirae Asset Investment Managers (India).
Mutual funds’ selling of government bonds reflect heightened caution due to the Iran war, alongside improving relative value in corporate bonds, Bafna said.
Fund managers are adjusting strategies to take advantage of current market conditions.
“The strategy is largely to shift towards segments offering better carry and relative value,” said Anurag Mittal, senior executive vice president and head of fixed income at UTI AMC.
Moderate-duration funds were favouring 1–3 year accrual, while active duration strategies are selectively investing in longer-end state debt and money market securities, Mittal added.
Mutual fund managers said wider corporate bond spreads were creating an opportunity to rebalance portfolios before the financial year-end.
Rajeev Radhakrishnan, CIO-fixed income at SBI Mutual Fund, the nation’s largest fund manager in terms of assets under management, said some investors may opt to switch to other asset categories in hybrid schemes.
“Apart from tactical positioning to potentially benefit from market dislocations and supply pressures (on government bonds) in the current stage of the cycle, moderate duration and credit risks strategies are preferred.”