India govt 1-5 yr bonds ripe for medium-term gains –LIC MF

Indian Rupee notes are seen in this picture illustration taken in Mumbai

By Dharamraj Dhutia

MUMBAI (Reuters) - Indian government bonds with a one- to five-year tenure are primed for medium-term gains at current levels, a fixed income official at LIC Mutual Fund said.

"The short-end is already at its peak and is unlikely to rise from current levels. The rate hikes and tight liquidity conditions are already discounted, especially at the shorter end," said Marzban Irani, chief investment officer – debt at LIC Mutual Fund.

"The current levels look attractive especially for the one-year to five-year part and one should lock in funds in these segments."

The benchmark 10-year bond yield was at 7.40%, while the liquid five-year bond yield was at 7.30%, with the spread at 10 basis points (bps).

The spread had turned negative towards the end of September but has since recovered as market participants expect the Reserve Bank to India to reach the terminal interest rate sooner than they did earlier.

The yield on the one-year to four-year bonds were in a range of 6.75% to 7.27%.

"Directionally the yields on the shorter end are going to fall and whether we buy at 7.25% or 7.45%, we know these levels are going to head downwards over the medium term. So, the objective is to capture the larger move," Irani said.

The fund manager said that while the 10-year benchmark yield could rise to 7.60%- or even 7.70%-levels due to supply pressure, the yield had peaked for bonds with up to five-year maturities.

Irani expects the RBI to pause rate hikes after a 35-bps increase in December and the Federal Reserve to take a breather after hiking rates in November and December.

"We do not expect the (Indian) central bank to go for more than one rate hike. Even if it goes for another rate hike after December, bond yields may not react as much as we saw after the September policy."

The RBI has raised rates by 190 bps since May, to 5.90%, to fight inflation that has stayed above its 2%-6% target for nine straight months through September. The Fed has raised rates by 300 bps since March.

(Reporting by Dharamraj Lalit Dhutia; Editing by Savio D'Souza)