India’s long-dated bonds are ‘clarion call’ for investors

Foreign bond investors in India are locking in yields amid signs the central bank is sticking with its high interest rates in the run-up to the securities being included in JPMorgan Chase & Co. indexes.

Global funds increased the proportion of notes due in 10 years or more to the highest in nine months in June, according to calculations by Bloomberg. The share held in short-dated securities has fallen steadily in that time frame.

The South Asian country’s debt has become a hot play among emerging markets, with investors attracted to its solid finances and stable currency. The prospect of the Reserve Bank of India keeping its policy rate at a five-year high to combat sticky inflation is adding to the allure.

“Duration is our clarion call,” said Lakshmi Iyer, chief executive officer of Kotak Investment Advisors. “Incrementally adding duration to your portfolio and adding bonds beyond the 10-year paper, in the 15-30 year segment, seems to be the best value for the buck right now.”

Foreigners have already plowed roughly $10 billion into the securities eligible to join JPMorgan’s index on June 28, and Goldman Sachs Group Inc. sees at least $30 billion more of flows in coming months as India’s weighting on the index steadily rises to 10%. That’s likely to keep bond prices buoyant.

Thanks to fiscal belt-tightening and RBI interventions to keep the currency on an even keel, investors at Goldman, Bank of America Corp. and BlackRock Inc. are bullish on the country’s debt and currency. But that newfangled popularity, as traders seek alternatives to China, risks causing a bubble that may burst.

A big risk stems from politics. Having unexpectedly lost his parliamentary majority in national elections and forged a coalition government this month, Prime Minister Narendra Modi may loosen the purse strings to mollify voters and political partners during his third term in office.

While news of Modi’s poor electoral showing triggered a bond selloff, the market later recovered after cabinet appointments including Finance Minister Nirmala Sitharaman were seen to indicate no change to the government’s pro-business stance.

Bloomberg Economics sees the combination of cautious fiscal policy and lower government borrowing pushing down 10-year yields and lowering the cost of capital for companies. The new government’s first budget may have a deficit target of 5% of gross domestic product, even with higher expenditure, according to Deutsche Bank AG.

“If we were to zoom in on one point of the curve, I would say probably seven to 10 years,” said Prashant Singh, senior portfolio manager at Neuberger Berman Group LLC. “From a liquidity perspective as well as the shape of the curve perspective, that is probably the sweet spot.”