How FPIs buy government bonds with a tweak
MUMBAI: Overseas investors have devised a new strategy on sovereign bonds – go long.
Foreign portfolio investors (FPIs) are now selling shorter maturity debt papers with up to four years shelf life to buy long securities of 6-10 year redemptions, said three people familiar with the matter.
The move will increase their average holding periods, enhancing returns on investment. New Delhis decision to include shorter-maturity papers in its borrowing basket has also burnished the allure of longer-duration bonds.
“Long-term real money global investors are seen increasing the average duration in their bond portfolios,” said Ashish Vaidya, head of trading at DBS Bank India. “They have drawn comfort from the proposed government borrowing plan with reduced long-term papers and the revised lower retail inflation expectations.”
The benchmark yield has fallen by 55 basis points in the past four-five weeks, pushing prices up. It pared some of its gains to close at 7.38% Tuesday.
“Yields are unlikely to rise meaningfully in the near term and overseas investors would continue to seek higher returns on their investment unless the rupee turns volatile (against the dollar), increasing their hedging costs,” Vaidya said.
Sovereign funds such as the Norwegian central bank Norges, global asset managers, and even hedge funds have already started buying longer-duration paper. There are about 15 such foreign investors that have been buying sovereign bonds in smaller tranches of about Rs 250-500 crore.
Norges could not be contacted immediately.
Earlier, the government said that its borrowings up to September would amount to about 48% (excluding bond buybacks) of the overall target for the financial year. Normally, the government proposes to complete 60% of the targeted borrowing in the six-month period to September. Bonds with one-four year maturities are 8.3% of the whole borrowing size.
"Foreign investors are elongating their average durations in gsecs," said M S Gopikrishnan, head of rates and treasuries at Standard Chartered Bank. “Although it will not reflect in the official data, global investors have adopted this new strategy after the government decided to cut the supply of long-term bonds this financial year."
Overseas investors have net invested about Rs 6,356 crore in just nine trading sessions in anticipation of gains between March 26 and April 10, show data from the National Securities Depository. Such buying interest should prevent local yields from rising further.