(Bloomberg) -- Buying longer-maturity Indian government bonds is probably the best strategy to boost returns in the $1.3 trillion market that's primed for a sustained drop in yields.
That's the call from Suyash Choudhary, a two-decade veteran, who has the bulk of his two main funds in 30-year notes. He believes that as these investments mature over the next few years, bond yields will be significantly lower. Investors who ignore this may end up with lower returns.
“The number one risk fixed-income investors are facing today is reinvestment risk as there will be a progressive decline in bond yields” Choudhary, head of fixed income at Bandhan Asset Management, said in an interview.
The government's push for fiscal discipline, compression in the current account deficit and the central bank's focus on inflation have strengthened the case for yields to drop, he said. These factors are likely to provide a boost to the bond market, along with the inclusion of the nation's debt into global bond indexes.
“Combined with India's very strong macroeconomic story, the inclusion is just the necessary nudge for foreign investors to start looking at India more actively,” said Choudhary, who correctly predicted the liquidity crunch in 2018. “India is poised for a structural move in fixed income.”
Indian bonds have been a favorite pick among investors since the JPMorgan's announcement in September that it will add the nation to its emerging-market index starting June 28.
Foreign ownership of local sovereign bonds will almost double to 4.4% of the outstanding debt over the next year after the inclusion, JPMorgan Chase & Co.'s strategists said in a note Wednesday. Global funds own only about 2.5% of India's the outstanding government debt, according to the US bank.
Bandhan's dynamic bond fund had more than 90% of its 23.2 billion rupees holdings in the 2053 bond, according to its most latest factsheet. The gilt fund also had similar proportion of its assets in 30-year bonds.
The yield on the benchmark 10-year bond is down 20 basis points this year to 6.97%, versus a 35-basis point rise in similar-maturity US Treasury yields.
“A lot of investors probably have still not kind of got to a level of conviction that interest rates may fall, and fall significantly,” Choudhary said.
READ: JPMorgan Index Listing Fuels $40 Billion Rush Into Indian Bonds
Indian sovereign bonds have seen about $10 billion of inflows into the so-called Fully Accessible Route — or FAR securities — since JPMorgan announced the move in September. The FAR bonds have no restrictions for foreign investors.
“Foreign investors are convinced about the macro story, they are getting high yields relative to other markets, and they believe the value of their investment will be preserved because the rupee won't show strong depreciation,” said Choudhary. “They will continue to invest more aggressively in India.”
--With assistance from Subhadip Sircar.
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