Indian bond yields witnessed an upward development because the 10-Yr Authorities bond yield surged by about 32 foundation factors to finish the month at 6.23%. Promoting was extra pronounced in all different maturity segments each at lengthy and the quick finish the place yields rose by 40-60 foundation factors in the identical interval. Spreads on Company Bonds and State Improvement Loans additionally witnessed strain as their yields rose by considerably larger proportion.
Within the Indian context, the largest growth within the month was the Union Finances within the first week of February. The federal government pegged the fiscal deficit for the monetary 12 months 2020-21 at 9.5% of GDP and set the goal for monetary 12 months 2021-22 at 6.8% of GDP. These have been a lot larger than the market expectations. The fiscal consolidation roadmap additionally received prolonged to decrease the fiscal deficit to 4.5% solely by fiscal 12 months 2025-26. This was a giant sentiment dampener for the Bond Market which has to soak up a a lot larger quantum of Authorities Bonds over a few years.
The RBI although prolonged its assist by way of phrases, failed to offer any outright dedication within the type of OMO schedule or quantum of its purchases. Nonetheless they purchased greater than Rs. 500 billion price of lengthy Authorities Bonds within the month of February 2021. However these had been of little assist in absence of any clear roadmap.
Going forward, RBI’s interventions will likely be key determinant for the trajectory of bond yields. Governor Das, at many events, have indicated that the RBI will proceed to conduct extra OMOs/twists to include long run bond yields from rising sharply. This may put a lid on the long run yields or at the least reasonable the momentum.
In close to time period international bond yields, crude oil costs and RBI’s market intervention will proceed to drive the bond markets. Nonetheless, given the sharp rise in yields, there’s a risk of some retracement decrease or consolidation round present ranges.
Shorter Maturity Bonds appears good from valuation viewpoint. For reference Authorities Bond of 3-Years maturity (~5.0%) is buying and selling at yield of greater than 100 foundation factors of over the coverage repo price (4.0%) and greater than 180 foundation factors over the efficient in a single day price (Treps price ~3.2%) as on February 2021.
For medium time period, we preserve our earlier view that bond yields have already seen their backside on this cycle and are prone to transfer larger over subsequent 1-2 Yr interval.
In Quantum Dynamic Bond Fund portfolio, we have been holding larger money in the beginning of the month which we deployed later as valuations improved after selloff. At the moment the portfolio is targeted on the 5-15 Yr phase of the Authorities Bond curve. It is a tactical place and we are going to proceed to observe a dynamic strategy to use any market alternative.
Within the Quantum Liquid Fund, we proceed to give attention to quick time period Treasury Payments and good high quality PSU Debt Securities.
Traders ought to acknowledge that the perfect of the bond market rally is now behind us and may decrease their return expectation from mounted revenue merchandise. It might be prudent for traders to be conservative of their mounted revenue allocation regardless of have decrease return in comparison with previous.
Traders who’ve larger danger tolerance and longer holding interval can benefit from the market alternatives by way of dynamic bond funds whereas conservative traders with very low danger urge for food ought to keep on with very low length funds like liquid funds.
(The author is a fund manager- mounted revenue, Quantum Mutual Fund.)