Lower your return expectations from debt MFs

Bond markets had a shaky start to the year 2021. Renewed optimism on economic recovery & fears of pick-up in inflation put the bond yields on an upward path globally. Last 2 weeks have been particularly turbulent when the pace of rise in bond yields caught investors by surprise and caused panic in all the financial markets across oceans. Indian bond yields witnessed an upward trend as the 10-Year Government bond yield surged by about 32 basis points to end the month at 6.23%. Selling was more pronounced in all other maturity segments both at long and the short end where yields rose by 40-60 basis points in the same period. Spreads on Corporate Bonds and State Development Loans also witnessed pressure as their yields rose by somewhat higher proportion. In the Indian context, the biggest development in the month was the Union Budget in the first week of February. The government pegged the fiscal deficit for the financial year 2020-21 at 9.5% of GDP and set the target for financial year 2021-22 at 6.8% of GDP. These were much higher than the market expectations. The fiscal consolidation roadmap also got extended to lower the fiscal deficit to 4.5% only by fiscal year 2025-26. This was a big sentiment dampener for the Bond Market which has to absorb a much higher quantum of Government Bonds over many years. The RBI though extended its support through words, failed to give any outright commitment in the form of OMO schedule or quantum of its purchases. Nevertheless they bought more than Rs. 500 billion worth of long Government Bonds in the month of February 2021. But these had been of little help in absence of any clear roadmap. Going ahead, RBI’s interventions will be key determinant for the trajectory of bond yields. Governor Das, at many occasions, have indicated that the RBI will continue to conduct more OMOs/twists to contain long term bond yields from rising sharply. This would put a lid on the long term yields or at least moderate the momentum.In near term global bond yields, crude oil prices and RBI’s market intervention will continue to drive the bond markets. However, given the sharp rise in yields, there is a possibility of some retracement lower or consolidation around current levels. Shorter Maturity Bonds seems good from valuation point of view. For reference Government Bond of 3-Years maturity (~5.0%) is trading at yield of more than 100 basis points of over the policy repo rate (4.0%) and more than 180 basis points over the effective overnight rate (Treps rate ~3.2%) as on February 2021. For medium term, we maintain our earlier view that bond yields have already seen their bottom in this cycle and are likely to move higher over next 1-2 Year period. In Quantum Dynamic Bond Fund portfolio, we were holding higher cash at the start of the month which we deployed later as valuations improved after selloff. Currently the portfolio is focused on the 5-15 Year segment of the Government Bond curve. This is a tactical position and we will continue to follow a dynamic approach to exploit any market opportunity. In the Quantum Liquid Fund, we continue to focus on short term Treasury Bills and good quality PSU Debt Securities.Investors should acknowledge that the best of the bond market rally is now behind us and should lower their return expectation from fixed income products. It would be prudent for investors to be conservative in their fixed income allocation despite have lower return compared to past. Investors who have higher risk tolerance and longer holding period can take advantage of the market opportunities through dynamic bond funds while conservative investors with very low risk appetite should stick to very low duration funds like liquid funds.(The writer is a fund manager- fixed income, Quantum Mutual Fund.)

from Economic Times https://ift.tt/384CdJe