Bond market in bear grip; invest in accrual or short term fund to beat volatility

The bond markets in India have been witnessing significant volatility l
ately. The 10-year Gsec yield has risen from the low of 6.37 percent in the month of Jan 2017 to 7.52 percent as of date.

By any count, this is a major bear grip on the market. The bond market has been wary on two counts — One is the rising CPI inflation and the second is the slipping fiscal deficit.

The CPI inflation has risen from 1.5 percent in June-17 to 5.2 percent in December 2017. This rise is partially on account of the seasonality of food & vegetables.

But, a more important contributor of this increase in inflation has been the energy segment. Since June-17, the crude oil has risen by 49 percent and is presently trading at around US$67 per barrel

On the other hand, the major taxation changes due to GST; and the impact of demonetisation, may have led to some hiccups in tax collection.

That and the need for supporting vital investment in infrastructure and social sector led to marginal slippage in the fiscal deficit in FY18 (3.5%). Though the Union budget has alleviated the fears of further slippages partially by keeping the fiscal deficit for FY19 at 3.3%.

In this backdrop, it is no surprise that RBI has kept the policy rates unchanged. The central banker is evidently trying to measure the evolving situation.

It wants to gauge as to how the government handles its finances, and how the CPI pans-out. Overall, the stance seems largely unchanged.

The central banker may be awaiting further data to determine the future course of action. The policy stance suggests that RBI seems in no urgency to trigger a tightening stance. It may also want to see the fallout of any policy action by the US Fed.

We believe that markets globally and in India may witness intermittent bouts of volatility in the bond market. Investors thus can utilise tactical asset allocation strategies to benefit from rising opportunities in the debt market.

Relatively high accruing yields and limited NAV volatility make a strong case for investment in accrual/short-term fund segment. For those seeking to lock into current yield, levels could look at allocation to fixed maturity plans (FMPs).

Bottomline, the policy statement has put a lid on to the markets ultra bearish imaginations and going forward global and domestic data points would be watched for by policymakers as also market participants.moneycontrol