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Fixed income markets continued its not to so good performance last financial year.
The lacklustre performance continued in March as well with higher bond yields due to high inflation on the back of Russia-Ukraine crisis. This high inflation was driven by high crude oil prices.
As a result, the Indian 10-year g-sec went up to 6.90% in March 2022.
As the new financial year kicks in, how is the debt market expected to behave in April? Let us see what debt experts have to say:
Mahendra Jajoo, CIO – Fixed Income, Mirae Asset MF
We could see some movement as the debt market would have to deal with two challenges — inching up of yields in the global market and the Ukraine crisis- The RBI policy on April 8 can deliver something new, given that inflation has remained above 6% for two months now. Also, this will be the first MPC meet post the Fed rate hike and the Russia-Ukraine conflict
- Markets will have to deal with government's large borrowing program for the new financial year, which will have an impact on yields
- Overall, the 10-year g-sec yields could go up by another 5 to 10 bps this month
Marzban Irani, CIO – Fixed Income, LIC Mutual Fund
Strong investor demand for debt papers in the secondary market kept the yields in check amid the absence of weekly g-sec supply- In April, there are a lot of factors which can push up yields. The inflation has been above RBI's tolerance limit for two months now. Fed is also looking aggressive and is expected to announce six rate hikes this year
- 10-year g-sec benchmark is expected to be in range of 6.75 to 7.05 in near future. With continued liquidity support from RBI and expectations of higher weekly supply on long end, short end of the curve is expected to be supportive
Rahul Pal, Head – Fixed Income, Mahindra Manulife MF
Yields inched up in March mostly due to rising inflation, especially on the back of rising oil prices. The 10-year g-sec rose to 6.90% in March from 6.76% in February- The January to March quarter witnessed good demand for gilt, state government securities and corporate bonds from PF and insurance companies. The demand along with the fact that there were no gilt issuances in March resulted in a good rally for bonds
- However, the rally may not last as government is set to restart borrowing program and the demand from PF and insurance companies is likely to wane
- The 10-year g-sec may rise to 7.25% in the near term, mostly due to high inflation. The yield curve, which is very steep right now, is expected to flatten in the medium term
What to recommend
Mahendra Jajoo
- Target maturity fund is one attractive option as returns are predictable and the portfolio quality is known
- Given the interest rate uncertainty, low duration funds are also a good option
Marzban Irani
- Given the uncertainty on the pace of rate hikes, low duration funds will continue to remain in favour
Rahul Pal
- Shorter duration funds should be preferred as it gives better protection against rising rates compared to medium and long duration funds
