Some Indian debt fund managers are cutting back on interest-rate hedges against their bond holdings, saying markets have already priced in an excessive rise in borrowing costs driven by a surge in oil prices.
Bandhan AMC Ltd. and ICICI Prudential Asset Management Co. are among those who have unwound their overnight indexed swap positions — an interest-rate derivative that, in the current market, benefits from a rise in rates. Sundaram Asset Management Co. also exited their hedge positions in relatively illiquid corporate bonds.
“We are not actively using OIS for hedging for the time being, considering that these were no longer effective given the amount of rate hikes they were pricing,” said Suyash Choudhary, chief investment officer for debt at Bandhan.
Interest-rate swaps have surged in the wake of the Iran war, with as much as 125 basis points of rate hikes priced in at the peak, Choudhary said. Even after the recent easing in rates, 50 basis points of potential hikes are priced in, he said.
The two-year swap rate is still trading near 6%, about 40 basis points above levels before the Iran conflict, showing markets continue to price in higher-for-longer interest rates. An exit from OIS positions means these funds are becoming more exposed to interest-rate movements again.
The Reserve Bank of India left rates unchanged in its April policy, but struck a cautious tone, citing risks to its inflation and growth outlook from the duration of the Middle East conflict. Most economists expect the RBI to stay on hold for an extended period, according to a Bloomberg survey.
ICICI Prudential AMC also had substantial so-called paid positions in OIS, which was a hedge against their long positions in the funds.
“At the current level of OIS, it doesn’t make sense to continue with” those positions, said Manish Banthia, chief investment officer for fixed income at ICICI Prudential AMC. “OIS is already pricing too much, so it doesn’t give me any hedge anymore. In fact, it’s a risk than a hedge.”
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