ICICI Prudential AMC sells India sovereign bonds to buy credit

The ICICI Prudential All Seasons Bond Fund is the best performing in its segment on a 10-year basis, according to the Association of Mutual Funds in India data.

India’s entry into a global bond index drew investors to the nation’s sovereign debt. It’s now time to rotate some of the money to corporate debt, according to an asset manager at a $102 billion fund house.

ICICI Prudential Asset Management Co. is slashing holdings of sovereign debt in its top-performing dynamic bond fund, Manish Banthia, chief investment officer for fixed income, said in an interview. He’s instead putting money in investment-grade corporate bonds with one- to three-year maturity, and in certificates of deposits.

“Given that many corporates have deleveraged, the risk in non-financial corporate bonds is quite low, making this segment appealing from a risk-return perspective,” Banthia said. “Conversely, sovereign bond markets appear overvalued, offering limited medium-term returns.”

His views come as some of his peers debate whether India’s long-tenor bonds are becoming too crowded on index-related inflows and bets the central bank will cut interest rates. At the same time, demand for Indian assets is driving corporates to raise money via debt markets and initial public offerings versus bank loans, as better rates sweeten the deal for them. That’s keeping debt loads and credit risk manageable for companies.

The ICICI Prudential All Seasons Bond Fund, which Banthia has helped manage since 2012, is the best performing in its segment on a 10-year basis, according to the Association of Mutual Funds in India data. The fund cut its sovereign bond holdings to 55.6 percent in July, from 61.1 percent in April, according to their latest fact sheet. Corporate debt holdings rose to 33.5 percent, from 28.9 percent, during the period.

The tide is turning for higher-yielding assets globally, as the Federal Reserve looks set to cut rates in September. That’s led to global money rushing into Asian bonds this year, with offshore investors pouring nearly $13 billion into Indian debt, according to data compiled by Bloomberg.

The country’s sovereign debt is among the best performing in Asia this year so far. The rally stalled recently, hovering near a closely watched threshold of 6.85 percent. The 10-year bond traded in a narrow range on Friday.

“The market’s current momentum is driven by favorable demand-supply dynamics. However, valuations in fixed income markets appear expensive, presenting more risk than return,” Banthia said. “While momentum investing may seem appealing, we remain cautious at this point of time.”