Debt funds: What to expect in March 2022

The month gone by was a mixed bag for the debt market. While the budget invoked fear due to enhanced supply of government bonds, the monetary policy brought in cheer as its tone was quite dovish. Also, bond yields continued to swing sharply on either side in response to global cues.  

Now, the obvious question - What holds in store for the coming month?

Here is what the experts believe.  

What to expect

Dhawal Dalal, CIO-Fixed Income, Edelweiss MF

• Bond market is likely to focus on the external factors like geopolitical risk and upcoming FOMC (Federal Open Market Committee) policy, crude oil prices, upcoming revision in fuel prices and their impact on inflation
• 10-year g-sec may trade between 6.65 and 6.85% this quarter
• Due to heightened volatility, normalization by DM (Developed Market) central banks and firming up of inflation across geographies, actively-managed fixed income funds may under-perform average inflation in CY 2022

Gautam Kaul, Senior Fund Manager - Fixed Income, IDFC MF

• RBI continues to maintain an accommodative stance even while central banks from the developed markets are poised to begin hiking rates
• Other factors to keep in mind are: Rising geopolitical tensions in the near term and structural pressure on long term rates due to adequate supply of bonds
• Expect heightened volatility in the near term

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra MF 

• There may be no additional supply of government bond this financial year. However, we may see supply of T bills and state loan auctions
• Expect the yield curve to flatten with the short end of the curve rising a tad sooner than the longer end
• Long bond yields could remain anchored as there is no sense of urgency on RBI’s part to hike rates. 10-year yield could remain in a tight 10-15 bps range from the current levels

Murthy Nagarajan, Head-Fixed Income, Tata MF

• Given RBI accommodative monetary policy stance, there is no expectation of rate hikes in the coming months
• Due to lower supply of government bonds, 10-year g-sec is expected to trade in the band of 6.60% - 6.80 % in the near term
• Expect corporate bond spread to trade at 20 to 30 basis points over government securities due to lower issuance and year end demand from insurance and EPFO (Employees' Provident Fund Organisation)

What to recommend

Dhawal Dalal, CIO-Fixed Income, Edelweiss MF

• Passively managed strategies for investors with at least three years of investment horizon

Gautam Kaul, Senior Fund Manager - Fixed Income, IDFC AMC

• Funds that focus on high credit quality and low to moderate maturity profile
• Funds that can take higher risk, either duration risk or credit risk or both

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra AMC

• Floater funds, dynamic funds and target date funds are most suited in such a scenario

Murthy Nagarajan, Head-Fixed Income, Tata MF