Debt funds: What to expect in June 2021

Bond markets remained range-bound in May 2021 largely due to RBI's government securities asset purchase program (GSAP 1.0) and continuation of accommodative stance. Also, the government has kept adequate cash balance to support the economy post the second wave of covid.

What to expect

Avnish Jain, Head - Fixed Income, Canara Robeco MF

• There is no expectation of any rate actions in the current fiscal, especially after the second wave of covid hitting demand in the first quarter of the current financial year
• Markets are likely to remain range-bound in the near term as RBI has been using various tools at its disposal to moderate yields. Supply in government bonds remain but RBI has been exercising the right to cancel auctions to ensure orderly market functioning
• 10 year g-sec is likely to remain in 5.95%-6.05% range. The short term of the curve is largely dictated by policy rates & liquidity conditions and is likely to remain range-bound in absence of any sharp global movements

Devang Shah, Co-head Fixed Income, Axis MF

• In the coming one to two months, the rates are expected to trade in thin range of 10-25 bps as due to the second wave of pandemic, RBI is expected to delay the normalization process 
• 10 year g-sec rates are expected to be in the range of 5.90% to 6.15% in the coming month
• As we are at the bottom of interest rate cycle, we don't anticipate any further fall in rates in the short end of the curve too during this period.
• It is believed that RBI will start normalization process in the second half of this financial year by absorbing excess liquidity and narrow the policy rate corridor by reverse repo rate hikes 

Mahendra Jajoo, CIO Fixed Income, Mirae Asset MF

• In the coming two to three months, RBI will focus on maintaining liquidity in the markets
• RBI's focus on maintaining low borrowing cost, INR stability and controlling inflation will continue to be the narrative till the year-end
• In the near term, debt market will be driven by RBI's stance and the success of the vaccination drive
• 10 year g-sec rates are expected to be in the range of 5.80% to 6.10% in the near term

Murthy Nagarajan, Head Fixed Income, TATA MF

• The vaccination pace continues to remain slow, which may lead to economic activity remaining muted for some more months
• RBI is expected to follow a dovish policy and continue with its accommodative policy for the current financial year. Markets are therefore expected to be range-bound for the next 3/6 months
• As RBI is active in the secondary market on 10 year g-sec, the ten year is expected to trade in the band of 5.90%- 6.10%
• The 3 year g-sec is expected to trade below 5% levels and the 5 year yield is expected to trade below 5.50% levels

What to recommend

Avnish Jain, Head - Fixed Income, Canara Robeco MF

• Investors can look at low duration and short duration funds for 1-3 year investment horizon
• Corporate bond is suitable for more than 3 year investment horizon
• Investors with higher risk appetites can consider income, gilt and dynamic bond funds with investment horizons of 3-5 years

Devang Shah, Co-head Fixed Income, Axis MF

• Short-term duration and medium-term duration funds for investors having a 3-year investment horizon
• Exposure in AA rated assets may be maintained up to 20% to 25% of the portfolio

Mahendra Jajoo, CIO Fixed Income, Mirae Asset MF

• Ultra short or short duration funds for investors who want to avoid volatility, they must be vigilant of the credit cycle as it has not played out completely
• For investors who have an appetite should remain invested and reap the benefit of the interest rate cycle

Murthy Nagarajan, Head Fixed Income, TATA MF

• Investors are recommended to stay in the short end of the yield curve
• Investors should invest depending on the time horizon

• Investors looking for accrual above one year time frame can invest in medium term fund