NEWS
Weak position for long bond funds

Clockwise from top: R. Sivakumar, Lakshmi Iyer, Kunal Valia, and Vishal Dhawan

Clockwise from top: R. Sivakumar, Lakshmi Iyer, Kunal Valia, and Vishal Dhawan

With bond yields on the rise, what should investors with long-term bond and government securities funds do? Experts tell Kayezad E. Adajania that a mixed portfolio or a focus on shorter tenor bond funds is the answer

R. Sivakumar, head-fixed income, Axis Asset Management Co. Ltd

Short-term bond funds will outperform long bonds

In the past 6 months, the bond market has been hit with an array of negative news—fiscal worries, rising oil prices and inflation, RBI’s policy risk, tight liquidity and global rise in yields. A lot of this has been priced in, so another large sell-off seems unlikely. But long-term bonds are vulnerable to fiscal outcomes. With a Rs10 lakh crore-borrowing programme next year and a market already saturated with government securities, the government will have to pay a premium to entice lenders. In fiscal 2017-18, the post-demonetisation surge in liquidity helped fund the government and a recovering credit market. With the liquidity tightening, there is likely to be a crowding out effect, further putting pressure on rates. So, long bonds may remain under pressure for some time.

Short-term bonds offer good value in these circumstances. The yield curve is steep at the short end and relatively flat thereafter. There is little compensation for higher duration risk. Also, short-term corporate bonds are available at a good spread relative to government securities. We expect short-term corporate bonds to outperform long-term government bonds in a positive growth scenario. Investors should build their core portfolio around short-term corporate bonds.

Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors

Think long term with long-term debt funds too

We are seeing a shift in investor behaviour towards equity. Many look at falling equity markets as both a part and parcel of equity investing, and as an opportunity to add exposure at a more attractive price, and then hold for the long term. But most investors continue to look at debt funds, especially long-term bond funds and government securities funds, as instruments that need to be bought or sold in shorter term, on the basis of their views on interest rates and inflation.

It is time for investors to look at their debt fund portfolios as well with a longer term perspective, and as a blend of different instruments such as deposits, bonds, shorter-term debt funds and longer-term debt funds like government securities funds and long-term bond funds. If an investor is significantly overweight on longer debt funds—which is not uncommon due to the high returns that these funds showed about a year ago—she needs to rebalance towards a mix of shorter-term and longer-term debt funds. If investors have a smaller allocation to these instruments, they should remain invested for a longer term. They should maintain a blended portfolio of shorter- and longer-term debt instruments, and avoid investing or exiting on the basis of past short-term returns data.

Lakshmi Iyer, CIO-debt, and head-products, Kotak Mahindra Asset Management

Bond yields scream ‘buy’, investors say ‘bye bye

Lately, bond market moves have been baffling. Over the past year or so, while benchmark repo rates have eased, bond yields have actually risen by 1.2-1.5%. This has not only been puzzling, but also a deterrent for investors to being meaningful participants in the government bond market.

While the Reserve Bank of India (RBI) has been inflation vigilant, it seems market participants are trying to outguess the RBI’s mind. So, it is not a surprise that the domestic institutional investor’s appetite has been muted.

To top it, the limits for FIIs in Indian bonds are near full, warranting an auction if they were to participate. Where are bond yields headed? For now, there could be limited upside in bond yields on a durable basis, notwithstanding small relief rallies in the interim. The mammoth government borrowing programme needs to be satiated with relevant demand, which is conspicuous by its absence.

While bond yields look a screaming ‘buy’, investors seem to be in a mood to say ‘bye bye’.

As an investor in a long duration fund, one needs to have the muscle to withstand future vulnerabilities in bond yields. A prudent risk-reward could be to have lower duration or a corporate bond kind of strategies as core allocations. Here, one could witness a relatively stable ride on fixed income investments. The idea is to make fixed income investing more a ‘joy ride’ and less a ‘turbulent journey’.

Kunal Valia – Director, Head of Fund Solutions India, Credit Suisse Wealth Management India

Shorter tenor bond funds offer better yields now

Long-term bond funds offer good returns potential only when interest rates in an economy are on a decline and the outlook adopted by the central bank is dovish. The Indian economy is passing through a scenario of likely fiscal expansion, inconsistent GST earnings, moderate to rising inflation, backed by sharp uptick in oil prices, and global central banks moving away from easy money policy. In India, the RBI maintained status quo on policy rate in its latest monetary policy meet in February. But the bond yields (short- and long-end) have moved up 80-100 basis points since August, on the expectation of fiscal slippage, rising inflation and a hawkish central bank. In a neutral to rising interest rate scenario, investors should focus on shorter tenor bond funds as they offer good yields with less sensitivity to rate movements. Those with long-term bond funds like gilt and income funds, may switch to ultra short-term, short term bond funds and fixed maturity plans.

[“Source-livemint”]

About the author

Related Post