India's Invesco MF sees favourable risk-reward for short-term corporate debt

By Dharamraj Dhutia

MUMBAI, Sept 30 (Reuters) - India's Invesco Mutual Fund finds short-term corporate bonds offering a favourable risk-reward trade-off, offering wider spreads over government debt at a time when markets have begun pricing in domestic rate hikes.

Surging oil prices and expectations of the first Reserve Bank of India rate increase since 2023 have pushed short-term corporate bond yields sharply higher.

AAA-rated LSEG benchmark three-year corporate bond yields were around 7.90%, up nearly 70 basis points in the July-September quarter.

In the same period, India's three-year government bond yield rose 50 bps to 6.70%.

This is offering an opportunity to investors to lock in the higher yields without taking on the greater risk of holding longer-dated bonds, according to Vikas Garg, head of fixed income at Invesco Mutual Fund, which had around 366 billion rupees ($3.81 billion) in debt assets under management at the end of August.

Longer-dated bonds tend to react sharply when interest rates are hiked.

Demand for short-term corporate bonds is also robust as banks, flush with diaspora deposits, have slowed issuing certificates of deposit — short-term bank debt instruments — reducing the supply of competing short-term paper, according to Garg.

"The market has already priced in an aggressive central bank rate-hiking cycle over the next year, resulting in a steep and elevated yield curve," Garg said.

The Reserve Bank of India is expected to raise rates to 5.50% next week, with one more hike likely in December, a majority of economists polled by Reuters said.

This comes as India's retail inflation rose to 4.82% in August, with rate hikes by major global central banks also setting the stage for a more hawkish RBI than previously expected.

With policy still closely linked to uncertain energy prices, a cautious, accrual-focused strategy is appropriate to limit volatility, Garg said.

($1 = 95.9800 Indian rupees)