Wait for spreads to rise before investing in corporate bonds: Puneet Pal of PGIM MF

Investors should hold off buying corporate bonds until the spread between Indian government papers and corporate debt widens at the 10-year part of the curve, PGIM India Mutual Fund's fixed income head said on Tuesday.

"We prefer being overweight in government bonds rather than AAA (rated) corporate bonds and would also prefer 2-5 (year) segment than the longer end," Puneet Pal said in an interview on the Trading India chatroom.

Currently, the spread between the 10-year government bond yield and corporate bond of similar maturity is 40 bps, and is expected to widen by 10-15 bps in the next quarter, Pal said. The current low spreads also make corporate bonds less attractive investment avenue for investors, he added.


The shorter tenure government bond segment or the three- to five-year maturity bucket offers better risk-reward for investors.

Pal expects the benchmark Indian 10-year government bond yield to remain rangebound in 7.20%-7.50% band over the next few months. It was last trading at 7.27%.

India's macro-economic indicators have been "pretty stable," turning bonds more "attractive" to foreign investors in the longer run, Pal said. "We will see bigger participation from abroad in due course."

Foreign investors have been shying away from government bonds due to depreciating rupee and higher hedging costs.

Inflation and rate hikes
"Peak Inflation is behind us," Pal said, adding that he expects inflation to inch lower unless there is "some major action in crude."

India's annual retail inflation eased to a three-month low of 6.77% in October, but still remained above the central bank's tolerance limit of 6%.

"We expect food inflation to come down in the next quarter, but its can be slightly sticky and volatile but overall do expect it to come down next quarter."

He expects retail inflation to break below the 6%-mark in July-December 2023.

Following the October inflation reading, Pal expects the Reserve Bank of India's policy repo rate to peak out in 6.50%-6.75% range. He sees the central bank hiking repo rate by 35 bps at the December monetary policy meeting.