Stable Indian government bond yields push investors towards more attractive corporate debt

Time of India

07-07-2025

Indian
mutual funds
and
insurance companies
are shifting towards an
accrual strategy
to capitalise on higher
corporate bond yields
, as government bond yields are expected to remain largely stable, investors told Reuters on Wednesday.
An accrual strategy focuses on earning returns primarily through interest payments, rather than through trading or capital gains. Fund managers are increasingly favouring
shorter-duration bonds
when yields are near the upper end of the range.
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The LSEG benchmark AAA-rated two-year and three-year corporate bond yields stood at 6.56% and 6.70%, respectively, on Monday.
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Stable Indian government bond yields push investors towards more attractive corporate debt
Indian mutual funds and insurance firms are increasingly adopting an accrual strategy, drawn by higher corporate bond yields amidst stable government bond yields. Mutual funds favor shorter-duration bonds, while insurance companies show interest in longer-duration bonds, specifically the five-year to 10-year part of the curve.
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The spread between corporate and government bond yields in these two tenors has risen around 20-30 basis points over the past month to 85 bps.
"As long as there is no danger of policy reversing, the two-three-year bonds will respond to local
liquidity
... so, we have already reallocated funds from the long bonds to the 2-3-year corporate bonds," said Sandeep Bagla, CEO at Trust Mutual Fund, which manages overall assets worth around 35 billion rupees ($408.00 million).
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The uptick in corporate bond yields has surpassed gains in government bonds since the
Reserve Bank of India
shifted its monetary policy stance and began withdrawing liquidity from the banking system.
"In the context of present market conditions and macro-economic environment, we are cutting duration... I am positive on the shorter end as liquidity is likely to flow there," said Killol Pandya, senior fund manager for debt at JM Financial Asset Management, which manages debt assets worth about 38 billion rupees.
"We have scaled back duration in our dynamic bond fund too," he said, noting that the company had gone from an exclusively government bond approach to strategically moving some funds to corporate bonds, towards the accrual system.
While mutual funds are concentrating on the shorter end of the corporate bond yield curve, insurance companies are showing interest in longer-duration bonds.
"We believe currently the most attractive part of the market is corporate bonds, especially the five-year to 10-year part of the curve," said Rahul Bhuskute, CIO at Bharti AXA Life Insurance.
The spread between five-year and 10-year corporate bond yields and government bond yields remains in the range of 75-85 bps.
($1 = 85.7850 Indian rupees)