Debt fund managers cheer lower borrowing
Decline in bond issuances will further improve demand-supply dynamics, say money managers
The lower-than-anticipated borrowing plan announced in the Interim Budget adds to the tailwinds for the debt market, which was already in a sweet spot on expectations of peaking of interest rates and demand pick up on the back of global index inclusion, say debt fund managers.
In a bid to bring down the fiscal deficit to 5.1 per cent in financial year 2024-25 (FY25), the government plans to bring down its gross borrowings to ~15.43 trillion, over 8 per cent lower than FY24. “5.1 per cent is a very good number. The lower-than-expected borrowings will further improve the demand-supply dynamics, which was already in a good shape owing to the inclusion of Indian government bonds in the JP Morgan index,” said Devang Shah, Co-head - Fixed Income, Axis Mutual Fund.
The positive surprise on the borrowing front led to an 8 basis point decline in 10-year government bond yield to 7.04 per cent. The decline in yields led to mark-to-market gains for bond and debt fund investors.
“We have been bullish on bond yields, and the Budget reinforces our view. The domestic demand for bonds will increase as provident funds, insurance, and banks grow. The foreign portfolio investor (FPI) demand for bonds is all but certain thanks to bond inclusion. In such a scenario, the government has reduced its gross borrowing by more than a trillion,” said Sandeep Yadav, Head - Fixed Income, DSP Mutual Fund.
“An increasing demand and a decreasing supply makes 2024 a good year for bonds. We expect the Reserve Bank of India (RBI) to sell bonds to buffer the sharp fall in yields, however even then the fall in yields should be significant,” he said.
Dhawal Dalal, President & Chief Investment Officer — Fixed Income at Edelweiss AMC, said G -secs are attractive across durations but the lower duration bonds (5-14 year) may be better placed right now.
“The issuances will likely be higher in the 15- to 30-year bracket as the yields have gone down in this segment and RBI would want to lengthen the duration of government borrowings. The supply may be lower in the 5- to 14-year bracket and that’s the reason we are more bullish on this segment,” he said.