Indian Long-Bond Bull Turns Seller As Supply Concerns Mount

Bandhan’s dynamic bond fund has dropped 3.2% over the past three months, faster than the category average decline of 1%, according to data compiled by Value Research. On Monday, the 10-year bonds fell to the lowest level since March, with yields rising 20 basis points over the past six sessions.

Choudhary had been one of the biggest bulls on the duration trade, citing the government’s fiscal discipline, compression in India’s current account deficit and the central bank’s focus on inflation as reasons for optimism. Those factors were likely to provide a boost to the debt market, he said in an interview in June last year.

But supply dynamics have since shifted. Since the start of financial year on April 1, state governments have also ramped up borrowings, particularly in longer maturities, Choudhary wrote in the note.

The average tenor of state bonds has climbed to 17 years in the first half of the fiscal year till date, well above the historical 12-year average, according to a Kotak Mahindra Bank note.

Still, Choudhary says the macro backdrop remains bullish for bonds. Fiscal worries are likely overdone, and much of the damage from RBI’s commentary and change in stance has played out.

The 14—15 year segment has more market participation, and the scope for yield compression against the benchmark 10-year paper appears stronger in this bucket, he said.