Kokusai, PineBridge Lead Japan Funds to Rupee on Best Return: India Credit

PineBridge Investments Japan Co. and Kokusai Asset Management Co. are leading Japan’s biggest bond funds to India as banks predict the rupee will deliver the best returns for Japanese investors among major currencies.

The rupee will hand investors total returns of 24 percent by the end of 2011 for yen-based buyers, the most among 33 currencies with forecasts in Bloomberg surveys of analysts, beating the 23 percent prediction for the Polish zloty and 19 percent for Indonesia’s rupiah. Kokusai added to holdings of Indian corporate debt in July, according to data compiled by Bloomberg. PineBridge said last month it would start to invest in India.

Japanese investors are starting to look beyond high-yield developed country debt after the Australian dollar rose 9 percent against the yen in the past six months. They turned net buyers of Indian bonds in the first 10 months from net sellers in 2009, while purchases of Australian notes fell almost 37 percent, data from the Ministry of Finance in Tokyo show.

“The yields are attractive, and we can expect appreciation in the local currency in the long term due to economic growth,” Kazuya Sugiura, managing director at PineBridge’s fund-business development division, said in an interview from Tokyo on Dec. 7. “As the central bank has taken actions to stem price gains, inflation may be stabilizing, which is also quite positive for investment in India.”

The rupee has gained 5.4 percent including interest income against the yen in the past three months.

PineBridge will start buying India’s debt next year for its 160 billion-yen ($1.9 billion) Blue Ocean fund with an initial allocation of a few percent of the fund, Sugiura said. The company plans to gradually expand the portion of such securities, he said. The fund is Japan’s biggest that invests in sovereign bonds of emerging economies.

Climb in Yields

The Reserve Bank of India boosted borrowing costs six times this year while the Bank of Japan has kept its benchmark rate near zero to combat deflation. Indian yields climbed relative to Japanese debt for the past five quarters, the longest stretch of increases since 2005, as the Reserve Bank lifted the repurchase rate to 6.25 percent last month and the reverse repurchase rate to 5.25 percent.

Australia’s central bank kept its key rate at 4.75 percent this month and said borrowing costs are “appropriate.” Indonesia has kept the benchmark rate at 6.5 percent since August 2009.

Australia’s highest short-term yields among developed nations helped make it the biggest recipient of funds from Japan in Asia Pacific. Buying the so-called Aussie offered Japanese investors a 44 percent return since the end of 2008, the third- most among major currencies after the Brazilian real and the South African rand. The rupee was 13th with a return of about 11 percent.

Australian Gap

Indian bonds dropped for a second day yesterday. The 10- year yield in India rose 1 basis point, or 0.01 percentage point, to 8.12 percent. The rate compares with 7.45 percent in Indonesia, 5.63 percent in Australia and 1.265 percent in Japan.

The yield difference between Indian and Australian bonds maturing in a decade has grown 58 basis points from the beginning of this year to 2.48 percentage points, and the spread between India’s and Indonesia’s securities widened to 67 basis points from minus 240 in the same period, according to Bloomberg data.

“We have consistent demand for higher-yielding assets, and with some of them getting relatively expensive, India is becoming more popular,” said Osamu Takashima, chief currency strategist in Tokyo at Citigroup Inc. “The yen may not rise so much from here, while the rupee may remain firm against the dollar. There are lots of yen looking for better returns.”

Cap Lifted

The U.S. bank predicts the yen will trade at 84 per dollar, compared with 83.82 in Tokyo yesterday, and the rupee to rise about 5 percent to 43 over the next six to 12 months, he said. The yen may weaken 7 percent to 90 yen against the dollar by the end of 2011, while the rupee may climb 5 percent to 43, according to analysts surveyed by Bloomberg.

The rupee slipped 0.3 percent yesterday to 45.22. The currency has risen 3 percent against the dollar this year, and is down 7.1 percent against the yen.

Elsewhere in Indian credit markets, Housing Development Finance Corp., India’s largest mortgage lender, plans to raise at least 1.5 billion rupees selling bonds, a person familiar with the matter said yesterday. The Mumbai-based company’s notes will pay a 9.25 percent coupon, the person said, asking not to be identified as the transaction is private.

Default Swaps

The cost of protecting against a default by State Bank of India, which some investors perceive as a proxy for the nation, has fallen 45 basis points in the past six months to 173 in the credit-default swaps market, according to data provider CMA. Such swaps are used to insure against missed debt payments, declining when creditworthiness improves and vice versa.

India lifted the cap on foreign investment in bonds for the first time in 18 months in September, boosting the limit on government notes to $10 billion and that for corporate debentures to $20 billion. Foreign investors won a quota totaling 220 billion rupees ($4.88 billion) to buy long-term government bonds and 201 billion rupees for the debt of infrastructure companies, the Securities and Exchange Board of India said Dec. 3.

Greater Investment

“It’s rational to assume increased investment into their bonds from overseas including funds from Japan,” said Takahide Irimura, head of emerging-market research in Tokyo at Kokusai, which manages about $58 billion of assets. Based on “foreign exchange and yield outlooks, India is definitely not a bad destination to invest,” he said. Irimura declined to provide forecasts or disclose investment positions.

Kokusai Asset, which runs Asia’s biggest bond fund, added holdings of debt of Export-Import Bank of India, Indian Oil Corp. and Indian Railway Finance Corp. for its Asia-Pacific Sovereign Open fund in July, according to the latest filings to the securities exchange compiled by Bloomberg.

The company and Daiwa Asset Management Co., the biggest holders of Australia’s debt based on public filings, were net sellers of the country’s bonds between June and August, according Bloomberg data.

Japan’s purchases of Indian securities totaled a net 12.8 billion yen in the first 10 months, the most since the amount for the whole of 2007, while buying of Australian debt was a net 1.38 trillion yen, down from 2.18 trillion yen in 2009, according to Japan’s Ministry of Finance. Indonesia saw net sales of 4 billion yen in the January-October period of 2010, compared with a net purchase of 60.5 billion yen for 2009.

“It’s possible to see increased flows from Japan into India, especially in short-term bonds such as the three-month notes,” Tadashi Tsukaguchi, a fund manager in Tokyo at Sparx Group Co., the region’s biggest hedge fund with $7.2 billion in assets, said in an interview from Tokyo on Dec. 7. “It’s a good idea to sell the yen against the emerging market currencies, such as the rupee, maybe early next year.”