10 yr yields going up even as RBI cuts rates is not an unusual phenomenon: yield curve steepening is generally seen at the end of a rate cut cycle, when the market starts positioning itself for what comes next after the cycle ends.
INR has been depreciating in 2025 and Anurag’s prognosis is that this can perhaps continue for a bit more. Settlement of the tariff issue with US will help a lot, but RBI will also need to rebuild its FX book sometime this year. Bond markets are not expecting any significant fillip from the currency front anytime soon.
Anurag sees the repo rate remaining at 5.25% for perhaps an extended period, so long as inflation remains in the 4% zone and growth comes in around 6.5% levels. He sees the 10 yr GSec trading in the 6.5% - 6.8%range for the next couple of quarters at least – which is where it currently is.
3 year corporate bonds look to him the most attractive place to be in today in the fixed income space. He also sees tactical opportunities in SDLs, which he plans to participate in opportunistically.
UTI MF has been reducing duration across funds over the last 6-8 months. Duration in its corporate bond fund and short duration fund are in the 2.5 – 3 yrs levels. Even their higher duration funds like Gilt and Dynamic Bond currently are running with 4-4.5 yrs duration, with overweight positions in 2-3 yr corporate bonds across funds.
For investors with more than 2 yrs time horizon, he says the simplest solution among debt funds is the Income + Arbitrage Fund, where the income portion is managed dynamically across debt categories and the 35%allocation to arbitrage gives investors LTCG tax benefits.
Commenting on the growing appetite for private credit funds among HNIs, Anurag says these products are trying to fill a gap that exists in terms of high yielding debt solutions. Investors need to keep 3things in mind when considering private credit funds:
1. Credit risk: When risk free rates are 6-7% and gross yield on private credit funds are15-16%, you need to be careful on credit risk. Many of these are special situations transactions – but one must be cognizant of credit risk and do your due diligence.
2. Liquidity: Most of these AIFs are locked in for 3-5-7 years – keep this in mind and account for this in your cash flows. Also keep in mind that forecasting a credit cycle into 5-7 years is a challenging ask.
3. Track record: For these reasons, it is critical to assess track record of the fund managers managing these funds. You ideally want to invest with managers who have navigated full cycles successfully.