Investors with a shorter duration horizon should invest in two-to-three-year bonds in the near term, said Devang Shah, co-head, fixed income at Axis Mutual Fund, referring to both government and corporate bonds.
“If an investor has 100 rupees, they could probably consider investing 50-60 rupees immediately and the remaining post the budget clarity.”
India’s finance minister Nirmala Sitharaman will present the budget for the next financial year to Parliament in early February.
The country’s two-year government bond yield was at 6.90% on Wednesday, while the three-year bond yield was at 7.13% and the benchmark 10-year bond yield was at 7.29%.
Shah said he expected the Reserve Bank of India to hike the repo rate by 35 basis points (bps) in December and 25 bps in February and that yields had already factored these in. “The carry at the shorter end is very attractive.”
“In the up-to-three-year segment, I would go for corporate yields, as the spreads are 30-40 bps higher than government yields and returns above 7.50%. We do not expect a massive sell-off in short-term bonds from these levels.”
He also recommended that investors park their cash in money market funds if the investment horizon is of six months to one year.
LONG-END RISKS PERSIST
However, Shah felt the risks at the longer end persisted and recommended against making longer-duration investments.
“There may be a high possibility that the government goes for a higher fiscal deficit number, and this may lead to the 10-year yield rising back to the 7.50%-7.60% levels,” Shah said.
He said he expects the benchmark bond yield may fall some more in the next few weeks and touch the 7.10%-7.15% range. The 10-year benchmark bond yield has dropped around 25 bps over the last one month.
He added that it was not a directional pivot and there was no surety yields may only fall. The current rally in prices can be termed a ‘momentum rally’, and the benchmark yield could trade in the 7.10%-7.40% band for the next few weeks, he said.
“Once investors find out that the 10-year yield ranges between 7.50%-7.60% levels, they may selectively start adding duration depending on their financial goals,” he added. (Editing by Swati Bhat and Janane Venkatraman)