(Bloomberg) -- Indian sovereign bonds with maturities of five-to-seven years are emerging as a favorite for investors, thanks to lucrative spreads.
Trading volumes in this segment have surged over the past week as cheaper funding costs help drive demand. Investors are being drawn to the belly of the curve also because short-tenor notes have already rallied in the wake of the central bank's rate cuts, while securities at the long end have been bogged down by supply woes.
“Government bonds even at the five-year point are offering close to 200 basis points over the effective overnight rate,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. in Mumbai. “With credit demand muted, this offers an attractive avenue for deployment of funds” for banks, he said, which are among the biggest holders of sovereign debt.
The Reserve Bank of India's liquidity push has left the financial system awash with cash, driving the effective overnight rate below its benchmark repurchase rate of 4%.
The central bank has pumped in more than $50 billion into the financial system and announced targeted liquidity operations to support some sectors of the economy.
The 6.79% bonds due in 2027 currently offer a spread of 195 basis points over the RBI's policy rate. In comparison, the new 10-year benchmark notes have a spread of 185 basis points.
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