Fund houses reduce debt buying amid rising yields

Not just Foreign Institutional Investors (FIIs), but even fund houses have reduced their debt buying in recent times. 

Data from Securities and Exchange Board of India (Sebi) shows that net buying by fund houses in debt was down to Rs 17,368 crore in May, a level close to what was seen in July 2014 at Rs 17,055 crore.

The reduced buying is due to hardening of yields and decrease in inflows to debt mutual funds by clients.

“Long-term investors continue to pump in money, but short-term investors have slowed down their investments. The scope for rate cuts in the near-term is seen limited due to which the short-term investors slowed down their investments,” said R Sivakumar, head of fixed income at Axis Mutual Fund. 

Bond yields have been rising despite three rate cuts since the start of 2015. This is because the street expects an extended pause by the Reserve Bank of India (RBI) after Tuesday's rate cut of 25 bps. The next rate cut may probably happen in the last quarter (January-March 2016) of the current financial year.

“It is not the end of the rate cut cycle but it may be a long pause by RBI. It is a very good environment for investing in bonds as long as the inflation trajectory remains lower. Most clients have already made the allocation they wanted to make in bond funds which is why incremental flows have slowed down. I would not expect the same pace of bond buying from mutual funds which was the case in the past,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.