- Fund Managers going to Government Bonds over the Corporate Bonds
- RBI has been constantly opening its doors to ease out the impact of COVID-19
Another fund manager, this time DSP Investment Managers Pvt. Ltd., has chosen the sovereign bonds over the Indian rupee-denominated Corporate Bonds which has added more strain on the finances of the companies when they are in need to build the buffers to bounceback from the economic fallout caused by the novel Coronavirus pandemic.
The spreads on the the corporate bonds needs to be more in order to compensate for the credit risk sais Head of Fixed Income at DSP Investment, Saurabh Bhatia, who manages Rs. 77,200 crore or $ 10.3 billion) worth of assets in India.
He said, “We remain overweight in sovereign bonds,”.
The Reserve Bank of India (RBI) has kept its doors open to help ease after it began using unconventional cash measures in late March to soften the blow caused by the novel Coronavirus pandemic.
The premiums on 10-year company debt over sovereign bonds have narrowed after the central bank funded banks’ purchases of 1.13 trillion rupees (Rs. 1.13 lakh crore) of corporate bonds and cut the benchmark interest rates to the lowest level since the year 2000 at least.
Another financial consultation firm named Quantum Asset Management Company recommends avoiding the higher-risk India credit as the biggest lockdown of the world has weakened the debt-servicing capacity of several countries considerably.
Bhatia from DSP Investments said, “We are building more duration in our portfolio and for that are now buying government bonds maturing in seven to 12 years rather than six to nine years we bought until last fortnight,”.
The yield gap between the top rated 10-year corporate bonds and other similar maturity government debts has been shrinking since late May after the Reserve Bank of India cut rates and pledged to take measures to protect the economy.
The spreads are at a two-month low of 82 bps (basis points), according to the data compiled by Bloomberg.
Fixed-Income Manager ar Quantum, Pankaj Pathak said, the slump in demand due to the Coronavirus pandemic “could create a negative spiral in the economy and hence in the loan and bond markets,” in a research note last week.
“We see the risk of a higher amount of rating downgrades and defaults in the next two years.”