Views- I don’t expect yields to cool off or come down in the near future

 

I don’t expect yields to cool off or come down in the near future

Ganti Murthy, Senior Fund Manager/ Fixed Income Professional

 

Ganti Murthy, Senior Fund Manager/ Fixed Income Professional

“I see yields moving up slightly if the crude price crosses 100 USD”, said Ganti Murthy, Senior Fund Manager/ Fixed Income Professional in an interview with Anjali Raulgaonkar 

Excerpts:

1) Bond Yields are high. Fixed deposit rates are also high. Where do you see yields moving on from here in the near to mid-term and why ?.

 

Yields are a function of demand and supply of money. In the current scenario, the central bank (RBI) has decided to make money dearer by keeping policy rates high with the laudable prospect of containing inflation.

 

High demand for money results in higher yields. Investors want higher yields, RBI wants higher yields to cool down inflation, companies need money to finance their next phase of expansion meet demand and government needs money to finance its infrastructure promises.

 

A worrisome prospect is the continuous rise in the price of crude oil. Brent Crude has touched a new high of 95 USD per barrel and the country which had benefited the whole of the previous year on the Russian Crude discount would not see that benefit now as the discount has vanished. Higher crude prices feeds into higher retail prices across the board making the fight against inflation all the more difficult.

 

In such a scenario I don’t expect yields to cool off or come down in the near future. RBI in its recent monetary policy meeting has maintained a quiet pause in its rate actions while keeping a lid on runaway supply of money.

2) What strategy would be good for investors to follow or adopt? In view of the latest Monetary policy where do you see g-sec yields moving?

Since I don't expect yields to come down anytime soon, I would say investors would be better off to stay invested in the short end of the curve up to 5 years duration .

With crude prices moving up touching a new high of 95 USD, I don't yields to come down in the near term. The current 10 year G-sec is hovering between 7.20% to 7.25% and I don't see much movement downwards from here. On the contrary, I see yields moving up slightly if the crude price crosses 100 USD.

3) What are your views on the inclusion of the Indian Bonds joining the J P Morgan bond index.

The major event of the bond markets was the news of the inclusion of Indian Government Bonds in the JP Morgan global Bond Index Fund.

The Fund, which has an AUM of 300 billion USD would now include Indian Government Bonds in its portfolio to the maximum extent of 10% of the AUM. This would translate into fresh buying of Indian G-sec to the tune of 20 billion to 30 billion USD. This event would result in:

a) Yields may come down due to fresh buying which may commence from June 24 onwards.

b) Fresh buying by a new investor in the markets would now free up the portfolios of Indian Banks, which are currently the main stay of Indian Bond markets and they can utilize their portfolios for fresh lending.

c) The currency can appreciate a bit which can help contribute in the fight against inflation.