Bond investors struggle to tell good from bad in India

IT'S hard to separate winners from losers in India's burgeoning market for state-government bonds. A recent debt auction saw West Bengal - a state struggling to meet its debt obligations - paying a coupon of 7.64 per cent to borrow for 10 years, the same as Haryana - a northern state that generates most revenue on its own, with limited reliance on federal grants.

The lack of price differentiation and liquidity is reason why global funds such as Pine-Bridge Investments Europe have largely stayed away from state bonds despite being granted access to them in 2015. Even so, raising funds isn't a tall order for states, as the implicit sovereign guarantee of their debt - besides yields that are typically higher than those on notes issued by the federal government - means they are a draw for local investors.

"The relatively little yield difference among states isn't reflective of their fundamentals," said Anders Faergemann, a senior fund manager in London at PineBridge Investments, which oversees about US$83 billion globally. "Bonds of 'good' and 'bad' states should be priced differently."