For some time now market experts have been expecting a turnaround in the interest rate cycle. While this is getting factored into the bond market, there has been pressure on account of supply and higher fiscal deficit.
The yield on 10-year G-sec has been falling from a high of around 9% in November. After the Reserve Bank of India (RBI) announced a cash reserve ratio cut on Tuesday, it fell around 10 basis points to 8.07%. But at the end of the day, 10-year G-secs yield went up to 8.35% after RBI’s comment on the possibility of not taking part in buying under open market operations (OMOs). But there are mixed signals on whether OMOs will continue. Says Mahendra Jajoo, chief investment officer (fixed income), Pramerica Asset Managers Pvt. Ltd, “Volatility will continue in the bond markets.”
Investors who are willing to take some risk can opt for dynamic bond funds. They can increase or reduce their average maturities depending on the fund manager’s outlook on interest rates. In simple words, they can behave like liquid funds on one day and long-term bond funds on another day. Those who wish to avoid much risk can go for short-term bond funds.