Indian mutual funds' July bond buy highest in over two years

A recent rise in yields turned Indian mutual funds (MF) into large buyers of government debt in July, with the trend expected to continue on bets that bond yields are nearing their peak, at least two fund managers said on Wednesday.

“The 10-year yield moving above 7.15% has made it attractive and people want to capture this move,” said Murthy Nagarajan, head of fixed income at Tata Mutual Fund said.

An increase in inflows into debt schemes allowed MFs to invest in longer term bonds, the best option to put in large sums in the debt market, Nagarajan added, saying he does not expect yields to move sharply in near future.

MFs bought government bonds worth a net of 213.46 billion rupees ($2.59 billion) in July, the highest since March 2021, data from Clearing Corp of India showed.

Bond yields rose in July on bets that interest rates will remain higher for longer in the United States, along with worries that retail inflation in India could jump on rising vegetable prices, making the Reserve Bank of India (RBI) more cautious.

Money managers had turned heavy sellers in June after the RBI’s hawkish tilt led to a sharp rise in yields, which led to stop losses being hit, according to traders. They sold bonds worth 142.1 billion rupees in June, after a net purchase of 91.7 billion rupees in the five months to May. While MFs would continue to be buyers after July’s purchases, the pace of buying could slow, said Shantanu Godambe, VP-investments at DSP Mutual Fund. The benchmark 7.26% 2033 bond yield was at 7.17% after having risen over 20 basis points over the last two months. He expects the benchmark bond yield to trade in 7.07%-7.17% in near term.

Godambe said MFs have been buying five-year to 10-year government bonds, echoing recommendations from Kotak Mahindra Asset Management’s fixed income head Abhishek Bisen of buying notes of that tenure.

Traders said the next major trigger would be the RBI’s policy decision and though any rate action is unlikely, inflation commentary would be key. ($1 = 82.5125 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Nivedita Bhattacharjee)


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