ndia’s largest pension fund plans to step up purchases of state debt, expecting their yield premium over the federal government bonds will widen further.
SBI Pension Fund Pvt., which manages about $64 billion of assets, favors state bonds as part of a carry-focused fixed-income strategy, Chief Investment Officer Sandeep Pandey said in an interview. The approach seeks to generate steady income from higher-yielding securities, such as state and corporate debt, rather than relying on capital gains.
“We are increasing our carry portfolio with slightly higher allocation to corporate bonds and state debt offering attractive yield,” Pandey said. “We would want to increase our incremental exposure to state bonds as we see supply increasing in the fourth quarter.”
The fund’s preference for state bonds may dent demand for federal debt at a time when Prime Minister Narendra Modi’s government is set to borrow a record sum to support India’s world-beating growth. Competition for funds may also push up borrowing costs for companies, leaving the bond market vulnerable as global interest rates and yields rise.
A surge in state bond supply, driven by higher spending on infrastructure, widened the yield premium over comparable 10-year federal government debt to a nearly five-year high of 90 basis points in April, more than double its level a year earlier. The spread has since narrowed to about 60 basis points but could widen again as issuance increases.
The January-March quarter is typically the busiest period for provincial borrowing as Indian states concentrate spending toward the end of the financial year. As yields rise, a carry-focused strategy can be attractive for a pension fund with long-dated liabilities because it can lock in higher income for longer. SBI Pension Funds had about 17% of its total holdings in state bonds at the end of October.
The pension fund has reduced the duration of its portfolio over the past 18 months, and more recently increased cash holdings, as it expects yields to remain elevated with the Reserve Bank of India raising interest rates.
“We will continue to have carry as a core strategy going forward,” Pandey said. He also likes top-rated corporate debt maturing in five years. In equities, which comprise about a quarter of SBI Pension Fund’s total investment book, he plans to increase exposure to large-cap stocks.
