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May was good for the debt market as the 10-year bond yield dropped below 7% recovering all losses from the previous month. With the possibility of stable government and lower inflation, there is a high probability that RBI will cut rates in the near future.
We spoke to Dhawal Dalal, CIO- Fixed Income, Edelweiss Mutual Fund, Pankaj Pathak, Sr. Fund Manager, Quantum Mutual Fund and Vikrant Mehta, Head - Fixed Income, ITI Mutual Fund who share their outlook on debt market and tell us which fund categories you should recommend to your clients.
Dhawal Dalal, CIO- Fixed Income, Edelweiss Mutual Fund
Outlook
- In May 2024, yields on Indian government bonds (IGBs) fell by 12-15 basis points (bps) due to positive global inflation news
- The Indian government's decision to reduce T-Bill auction sizes by Rs.10,000 crore for the next six weeks improved market sentiment, leading to a 5-15 bps decline in short-term yields
- We are optimistic about IGBs because of expected political stability in the 2024, prudent fiscal management by the government, the start of FPI inflows due to index inclusion and a favorable macro-economic environment
- We anticipate the IGB yield curve to steepen gradually in the near term as investors prefer bonds with maturities of 10 to 15 years
Funds recommended
- We recommend investors to consider raising the duration of their fixed-income portfolios by investing in funds that are overweight in 10- to 15-year IGBs with an investment horizon of at least six months
Pankaj Pathak, Sr. Fund Manager, Quantum Mutual Fund
Outlook
- Bond yields dropped due to a partial reversal in US treasury yields, fall in crude oil prices, softer domestic inflation, the government's bond buyback announcement and larger-than-expected RBI dividend
- The debt market outlook looks good because of low inflation and accommodative monetary policy
- The government plans to reduce its deficit to 4.5% of GDP by FY26. This would lead to lower supply of government bonds
- On the other hand, demand from insurance companies, pensions and provident funds is growing at a solid pace
- RBI may wait for the US Federal Reserve to change its stance before cutting rates and demand for long-term bonds may increase
- We expect 10-year bond yields to reach 6.25%-6.50% by the end of the year
- Short-term bond yields might also decrease because of RBI’s plan to infuse liquidity in the system
- Overall, we expect bond yields to decrease significantly over the next 6 to 9 months
Funds recommended
- Dynamic bond funds are very well positioned to gain from the potential fall in interest rates
- Investors with shorter time horizon should stick to liquid funds or other money market categories
Vikrant Mehta, Head - Fixed Income, ITI Mutual Fund.png)
Outlook
- May 2024 was a month of consolidation for global bond markets as US retail inflation grew less than expected, US employment figures were weaker than projected and Indian risk assets performed well in May
- The 10-year Government of India (GOI) bond yield dropped below 7%, recovering all losses from the previous month
- Geopolitical volatility and the upcoming Lok Sabha Election advise a cautious approach with a neutral to modest overweight in bond durations in the short term
- We are positive on bond durations for the mid to long term, expecting the 10-year GOI bond yield to trade around 6.75% in the second half of the financial year
- Post-election government spending is likely to improve liquidity, with the short end of the yield curve expected to perform better than the long end
Funds recommended
- Duration funds like dynamic bond funds or banking and PSU debt funds are recommended
