An Indian fund manager who went contrarian and sharply reduced the average maturity of his flagship bond fund is further cutting the duration on the expectation the central bank won't reduce interest rates before global peers.
Tata Asset Management Pvt. has slashed the average maturity of its sovereign bond fund to about five years, from over eight years last month and 16 years in December, Akhil Mittal, senior fund manager, said in an interview. That compares with a maturity of nearly 14 years for the benchmark Crisil dynamic gilt index.
The asset manager broke with peers by cutting duration, which measures a bond's sensitivity to changes in interest rates. The move highlights growing wagers that the Reserve Bank of India may follow the Federal Reserve in delaying cuts in borrowing costs.
“The markets are looking at the other side but probably have not factored in some key risks like delayed easing cycle by central banks, dollar strengthening on the back of flight to safety, along with the possibility of a sharp spike in crude prices,” said Mittal, who manages about 140 billion rupees ($1.7 billion).
The prospect of a less dovish Federal Reserve means the pick up in US yields relative to Asia may remain high, likely spurring a withdrawal of global funds from the region and driving down local currencies. Middle East tensions also risk higher oil prices, a major import for India that can fuel domestic inflation.
Mittal is going overweight on the belly of the curve — five to 10 years — to reduce interest-rate risk, and a segment which may benefit from foreign flows as Indian bonds get added to JPMorgan Chase & Co.'s global bond index from June.
“There is no immediate or compelling case for the RBI to cut rates ahead of the global move,” Mittal said. The RBI will take 12 to 18 months to reach its 4% inflation aim and won't be in “any rush to prematurely withdraw the tightening cycle.”
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