UTI AMC is reducing the 10-year benchmark from its portfolio and moving towards 2 to 5-year AAA bonds. Anurag Mittal, fixed income head, UTI AMC tells Ananya Grover and Christina Titus that investors should stick to moderate duration bonds to avoid volatility in fixed income. Excerpts:
Do you think the rate cut cycle is over?
We believe that the bar for future rate cuts is pretty high. We expect that the policy rates should remain lower for longer, because the RBI wanted to see a certain growth as well and probably the underlying drivers for growth are slightly on the weaker side. There could be some downward adjustments in growth but I am not sure if that will warrant a rate cut.
Has there been a shift in your strategy after policy?
For the last 6 months we have been of the view that the rate cut cycle was coming to a close and the market always works on expectations. It was largely expected that RBI will enter a terminal rate of somewhere close to 5.75. Usually at the end of rate cut cycles, the curve tends to steepen. So, we have been playing the steepening trade.
We were overweight on 3-to 5-year high quality corporate bonds. In the actively valued fund where the mandate is discretionary, we bought the high quality 5-year, 3-year bonds and some portion of the 10-year government bond because that’s more sensitive to the changes in the monetary policy plus at that point of time we were also slightly negative on the long end supply.
So, we were of the view that the narrowing of the spread between 10 to 30 was pricing in too much of demand from long term investors which we thought was largely done. In government bonds, we were overweight in the 10-year benchmark. Now, we are reducing the 10-year benchmark and moving largely towards the 2 to 5-year AAA space depending on the fund mandate.
Going ahead, how do you see 10-year benchmark papers performing?
Given less expectations of reduction from RBI, we can assume the 10-year to hover somewhere between 6.35 to 6.55. But it will now depend on how global cues stack up and how inflation trends come about. But that’s where largely we think 10-year should trade well.
What would be your advice to debt investors, considering the current interest rate cycle?
The overall interest rate cycles in India, especially since inflation targeting has been established, are quite shallow. It is better to stick to asset allocation and not taking very aggressive duration of credit, stick to either debt plus arbitrage or stick to a short term or a high-quality corporate model fund.
Sebi recently proposed allowing sectoral funds in debt. Are these needed?
There is definitely a need. Certain sectors are more regular issuers in the capital market like the financial and infrastructure. So, it gives an option to the investor to look at a certain sector more closely and the investor can get better yield pickup than a fully blended fund. As far as the investor is aware of the risks, I think it is a good option to give that to the investor because even when they buy a bond directly, they are taking a single concentrative bite.
Is there an increased retail interest towards lower rated papers?
I am not sure whether there is a very decisive shift right now, but a certain class of investors are increasingly looking at them. I think the issuances are also increasing in the low-rated segment.
What can be done to boost retail participation in the debt market?
If you look at global markets, where interest in corporate bonds is high, the investors are able to price in a distressed value of an asset as well and there’s a mechanism for recovery. That is developing already but I think once there’s more certainty about timelines and investors have an idea, pricing in distressed debt will become more accurate.
Disclosure standards of corporates are also improving. As it continues to improve, people can really analyse the debt situation, they can take their call accordingly. More disclosures from rating agencies, when they give rating on bonds, will also help for an investor to assess the underlying creditworthiness of the bond.