MUMBAI, Aug 10 (Reuters) - India's IDFC Mutual Fund said on Wednesday their preference was four-year to five-year tenure government bonds, as effective overnight rate was expected to peak below 6.00% in the current interest rate cycle
** "At an effective peak funding rate of 5.75%, this leaves approximately a 125 bps term spread on these yields, which is quite comfortable. The ongoing flattening between 4 years and 1 year is consistent with our view," the fund house said in a note.
** Four-year 5.74% 2026 bond yield was at 6.93%, while five-year 7.38% 2027 bond yield was trading at 7.03%, and 10-year benchmark bond yield was at 7.32% at 0742 GMT
** The fund house expects spread between four-year and 10-year bond yield to rise as market prices in heavy debt supply ahead, hence the four-five year part of the curve offers best risk-reward.
** "Basis the pace of breakage globally, and assuming most of the current commodity price fall off sustains, we are even comfortable with assigning 5.75% as our peak effective overnight rate expectation," the fund house further said.
** On Aug. 5, the Reserve Bank of India hiked repo rate by 50 basis points to 5.40%, which was its third straight rate hike. (Reporting by Dharamraj Lalit Dhutia; editing by Neha Arora)
