Global Bond Funds Find Surprising New Target in India

With overseas investor limits for India’s high-yielding sovereign debt almost used up, bond funds are starting to buy up state notes. Problem is, finding decent data on the local economies.

Aberdeen Standard Investments started buying the securities about three months ago and they now account for about a fifth of its $312 million Indian bond fund, said Lin Jing Leong, a fixed-income investment manager in Singapore. Finding timely figures on the states is challenging, she said, Bloomberg reported.

The highest yields among major Asian emerging markets have made Indian government debt a favorite with overseas investors, who have pumped about $20 billion into rupee securities this year. State bonds, which offer an extra 60-70 basis points of yield over the sovereigns, trade at very similar levels despite differences between the local economies. That’s because the Reserve Bank of India has a zero percent risk rating on the notes, meaning domestic investors treat the unrated securities like federal debt.

Foreigners are a bit more wary. The lack of differentiation in spreads means Nomura Asset Management favors debt from states with the stronger finances, said Simon Tan, a fund manager in Singapore, who oversees Nomura’s Indian bond fund. He declined to name the states he likes. While Tan started buying the debt in 2015, it still makes up less than 1% of the fund’s $1.75 billion of assets.

“We’d like to increase our exposure but are unlikely to until the liquidity situation improves,” Tan said in an interview.

The Reserve Bank in its October policy document said it would release high-frequency data on state finances available with it, and hold state bond auctions on a weekly basis. Improving liquidity by reselling debt and buybacks is also on the cards.

Inadequate data apart, large supply of state debt is also a concern as local governments need funds for higher pay for their staff and farm loan waivers. Net borrowing by states is estimated to rise to 3.8 trillion rupees ($58 billion) in the year to March, up 12% from the previous year, said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered Plc in Singapore.

States are due to sell up to 1.3 trillion rupees of bonds in the December quarter, as per RBI.

Overseas funds had used up 14% of their state bond quota as Monday, versus almost 100% of the sovereign limit, data from National Securities Depository Limited show.