Bond Markets get a breather – what should debt fund investors do now?
Indian Bond Markets got a breather this week, after posting their worst 7-month run in two decades – much to the vexation of the lakhs of new investors who jumped ship from FD’s to debt mutual funds; freshly christened by AMFI as the ‘sahi’ investment vehicle for the layman.
Buoyed by the announcement that the government would be borrowing less than planned in the first half of the new fiscal year, the yield on the benchmark 10-year G-Sec fell by an impressive 30 bps earlier this week, falling as low as 7.28% intraday yesterday - before hardening again to around 7.40%.
The knee jerk reaction to the first piece of good news in a long time hinted that debt markets are already pricing in a lot of negatives. Earlier this year in this article, I had suggested that fixed income investors may consider taking a measured exposure to duration funds in a staggered manner, using the STP route, as debt market valuations had started looking attractive.
The growth-inflation matrix suggests that the RBI isn’t likely to revise key rates upwards this year. Corporate growth is recovering – but is yet in a nascent stage, the CPI is likely to hover around the 4.5% mark in H2 2018-19, suggesting an extended continuation of the current policy (the RBI’s hawkish tone notwithstanding). in February’s MPC meet, only one member (Dr. M. Patra) had voted for a 25bps rate hike.
In the medium term, it’s quite likely that bond market movements would be influenced less by RBI rates; and more by factors such as demand-supply dynamics, growth in credit, crude prices, and the stances of international banks on their key rates.
Although we may see rates inching up again in the coming months, this would serve more an opportunity for investors to lock in duration than anything else. The spreads relative to the repo rate are at a 6-year high, and the G-sec yield relative to the equity earnings yield is much higher than the long-term trend.
When you correlate the above with the slim chances of further rate increases in 2018, it follows that we may very well see yields trending down in the second half of CY 2018. Fixed Income investors should consider building a 25% to 40% exposure to higher maturity debt funds at this stage, but in a staggered manner using weekly or fortnightly STP’s and over the course of 4-6 months.
