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News From Press Go with accrual funds as govt bond market is expected to remain volatile

Go with accrual funds as govt bond market is expected to remain volatile

Source: Business Standard Apr 16, 2018

The 10-year government has been very volatile in the past couple of months. From a low of 6.41 per cent on July 24, 2017, the benchmark yield rose all the way up to 7.78 per cent on March 6, 2018, before declining to 7.18 per cent on April 6. Since then it has risen once again to around 7.47 per cent. Investors need to pursue a carefully calibrated strategy for their fixed-income in a year when bond yields are expected to be volatile.

What’s going on? Between July last year and early March this year, bond yields surged primarily on account of fears of higher inflation. These fears dissipated some time ago with consumer price index inflation rate printing lower than anticipated. Another factor driving yields up earlier was the heavy supply of bonds, both from central and state governments. Moreover, the portion of bonds that banks can keep in the hold-to-maturity (HTM) category has been reduced. With bond yields rising, and public sector banks flush with bonds, they were not purchasing more bonds since they would have to keep them in the mark-to-market category. On the international front, the US Federal Reserve is on the rate hiking path while other central banks are cutting back their liquidity infusion programmes.

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