Don’t get carried away with aspirations of a structural bonds bull market yet. Demand for Government bonds is structurally improving –both domestically as well as from FIIs. Supply of Govt paper is also reasonable due to prudent fiscal management. However, inflation is likely to come in the way of any sizeable interest rate cuts.
Food inflation has averaged 6.3% since covid days and is proving a bit sticky. Core inflation softened due to fall in global commodity prices – but that luxury may not last for too long more. Expect inflation to run slightly above RBI’s comfort zone – which will probably result in this rate cut cycle not extending beyond 50-75 bps over the next 12 months or so.
With some of the positives already likely priced in, expect the 10 yr G-Sec yield to be in the 6.75% - 7% range by March 25.
AAA corporate bonds are currently yielding healthy accrual of 7.7-7.8% and also offer an opportunity for some capital gains when the rate cut cycle commences. Short term funds, medium term funds, corporate bond funds and banking/PSU funds that focus on this segment offer an attractive investment opportunity today.
Long duration funds make sense as part of a long term asset allocation, where investors want to reduce reinvestment risk and are less concerned about intermittent volatility. But if you are expecting to make handsome capital gains from a deep rate cut cycle, Anurag reiterates that UTI’s view suggests against such expectations.
Anurag suggests SDL 2033 target maturity fund as 9 and 10 yr SDLs are currently trading at 7.6% annualized yield – which is higher than corporate bonds – an aberration that offers a good opportunity to lock into healthy accrual.