With bond yields on the rise, what should investors with long-term bond and government securities funds do? Experts tell Kayezad E. Adajania that a mixed portfolio or a focus on shorter tenor bond funds is the answer
R. Sivakumar, head-fixed income, Axis Asset Management Co. Ltd
Short-term bond funds will outperform long bonds
In the past 6 months, the bond market has been hit with an array of negative news—fiscal worries, rising oil prices and inflation, RBI’s policy risk, tight liquidity and global rise in yields. A lot of this has been priced in, so another large sell-off seems unlikely. But long-term bonds are vulnerable to fiscal outcomes. With a Rs10 lakh crore-borrowing programme next year and a market already saturated with government securities, the government will have to pay a premium to entice lenders. In fiscal 2017-18, the post-demonetisation surge in liquidity helped fund the government and a recovering credit market. With the liquidity tightening, there is likely to be a crowding out effect, further putting pressure on rates. So, long bonds may remain under pressure for some time.
