The stance of Mutual Funds (MF) in the government bond market has shifted in May, with fund houses now engaging in a selling spree, offloading around Rs 900 crore worth of bonds so far.
MFs emerged as significant buyers of government bonds in April, net purchasing approximately Rs 10,384 crore worth of gilts. According to fund managers, this change in behaviour can be attributed to some fund houses capitalising on profit opportunities by selling bonds, while others are actively trimming the duration of their portfolios.
“It is difficult to gauge based on the last two-three days of data, but it clearly looks like that some are actively reducing the duration as can be seen from daily return of G-Sec funds,” said Dhawal Dalal, president & CIO – Fixed Income at Edelweiss Asset Management Limited.
“Also, there are some redemptions in liquid funds, so it may be possible that they are sellers of short-term government securities,” he added.
“From a strategy perspective, while the overall call is to play a falling interest rate cycle over the next 6-12 months, markets are likely to see sporadic rate movements. In the current scenario, investors should use the rise in yields to build in duration across their portfolios,” said a note by Axis Mutual Fund.
“With positive demand supply outlook for bonds and improved liquidity stance of RBI, investors could use this opportunity to invest in short to medium-term funds with tactical allocation to gilt funds. We maintain a higher allocation to corporate bonds and SDL’s due to lower issuance and perceived change in RBI’s liquidity stance,” the note said.
The RBI’s announcement of a Rs 40,000 crore bond buyback on Thursday is speculated to be a measure aimed at injecting liquidity into the banking system. The securities scheduled for buyback include the G-Secs 6.18% 2024, 9.15% 2024, and 6.89% 2025.
Notably, there is no specified amount for individual securities, and the auction process will employ the multiple price method.
Mutual funds are expected to be the primary beneficiaries of this action, given their substantial holdings of short-term paper, including the three bonds targeted for buyback by the government.
The liquidity in the banking system was in a deficit of Rs 1.38 trillion on Tuesday, according to the latest data by the central bank.
First Published: May 08 2024 | 7:42 PM IST