Indian debt fund managers are implementing sophisticated trading strategies to capitalize on multi-year high swap rates and enhance fixed-income returns. According to reports from NDTV Profit and The Hindu BusinessLine, Aditya Birla Sun Life Asset Management Co. and DSP Asset Managers Pvt. are among the fund houses engaging in corporate bond-swap trades. These institutions are purchasing floating-rate corporate bonds and utilizing overnight index swaps to convert them into synthetic fixed-rate investments, effectively locking in higher interest rates for their investors.
Swap rates have experienced significant gains since the US-Iran war began in late February, as traders anticipate an oil-driven inflation surge leading to tighter monetary policy. As reported by NDTV Profit and The Hindu BusinessLine, the three-year OIS touched its highest level since 2023 last week, with markets pricing in 125 basis points of rate hikes over the next year according to MUFG Bank Ltd., compared to their base case of only 50 basis points of increases. This environment has created attractive opportunities for corporate bond-swap trades, with the OIS market factoring in substantial rate hikes that are driving increased trading activity.
Investors are generating substantial returns through these strategic trades, with Sunaina daCunha, co-chief investment officer for debt at Aditya Birla Sun Life, reporting that investors are earning 75 to 100 basis points more than regular bond yields by entering swap agreements with floating-rate corporate bonds. According to NDTV Profit and The Hindu BusinessLine, this trading mechanism involves purchasing floating-rate bonds that typically pay interest linked to a three-month Treasury bill rate plus a credit spread, then using overnight index swaps to exchange floating payments for fixed ones. The surge in floating-rate bond issuances reflects expectations of higher global interest rates making fixed-rate debt less attractive.
The floating rate bond market has witnessed significant activity as issuers capitalize on favorable conditions. As reported by NDTV Profit and The Hindu BusinessLine, at least five issuers have sold floating rate notes since mid-May, raising ₹6,400 crore. Two additional issuers, Cholamandalam Investment and Finance Co. and Muthoot Finance Ltd., are scheduled to seek bids for up to ₹10,000 crore on Monday, with Cholamandalam alone planning to raise ₹5,000 crore, potentially making it the largest floating-rate bond sale ever by a local lender.
The floating rate bond market surge benefits both investors and issuers in the current environment. According to Suyash Choudhary, chief investment officer for debt at Bandhan AMC Ltd., issuers are obtaining volumes in what is otherwise a challenging market. Shantanu Godambe, a fund manager at DSP Asset, explains that lenders like Cholamandalam and Muthoot typically earn floating-rate income from loans and assets, making issuing floating-rate liabilities beneficial for balance sheet matching. Most floating-rate bonds issued by shadow lenders in recent weeks have been three-year notes, matching the maturity segment where swap rates have risen the most, reflecting the current market dynamics.
