Short-term debt shines in market awash with cash
Buying short-tenor debt is the most popular trade in Indian markets these days.
The rush for these assets has driven yields on some bonds to levels below those seen during the global financial crisis, while allowing some states to sell bonds at yields below the sovereign. Companies have taken note, selling a record amount of debt maturing in three years or less in the latest quarter.
The funnelling of excess liquidity-- and there's Rs 6.4 lakh crore ($85.3 billion) sitting around --- into just that space reveals the anxiety investors have over the outlook of an economy that was once the fastest-growing in Asia. That, along with concerns over record debt sales, is making the yield curve steeper and complicating the central bank's efforts to moderate borrowing costs.
"There is a rush for shorter assets amid abundant liquidity, which is expected to remain easy at least till this quarter," said Manish Wadhawan, founder at Serenity Macro Partners in Mumbai. "A steeper yield curve will push up borrowing costs and hurt economic recovery."
"Investors are favouring shorter-tenor debt because there is uncertainty regarding India's economic outlook," said
Ajay Manglunia, managing director and head of institutional fixed income at JM Financial Products. "If they invest in longertenor assets, the risk they bear is higher too."
The RBI had to act to rein in the relentless curve steepening. Last week it bought Rs 10,000 crore of bonds and sold an equal amount of treasury bills, but there's a lack of clarity on the frequency of such measures.
Companies sold a record Rs 1.3 lakh crore of debt maturing in three years or less in the latest quarter.
Investor focus on shortterm debt is raising doubts about the demand for longer tenors as a bulk of the government's bond sales fall under this category. In a reflection of these concerns, yields on the benchmark 10-year bond rose 12 basis points in June after falling for the previous four months.
However some investors see the short-end trade getting crowded, prompting more interest higher up the yield curve.
—Bloomberg