Bond yields expected to drift lower over next one year; What should investors do?

  • Long bond yields in India expected to stabilize in the coming months and decrease over the next year. Investors advised to increase Fixed Income allocation at yield upticks. Dynamic Bond Funds and Gilt Funds likely to perform well this year.

Ankit Gohel
Published7 May 2024, 01:24 PM IST
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Positive demand/supply dynamics will continue to favour bonds with the inclusion in the JP Morgan Emerging Markets bond index kick starting from end June.
Positive demand/supply dynamics will continue to favour bonds with the inclusion in the JP Morgan Emerging Markets bond index kick starting from end June.

The recent rise in US Treasury yields, outflows of Foreign Portfolio Investors (FPI) from Indian bonds happening for the first time in the last seven months and the rupee coming under some pressure in spite of pretty strong underlying fundamentals have all led to a rise in Indian government bond yields. 

However, with the global monetary tightening cycle effectively ending and rising hopes of interest rate cuts by the US Federal Reserve, analysts expect the bond yields to stabilise going ahead and further drift lower.

The Indian government bond yields traded flat on Tuesday, with the benchmark yield at around 7.10% levels, while US peers remained flattish. The benchmark 10-year yield was at 7.11%, following its previous close of 7.10% - its lowest closing level since April 4.

Global bond yields declined after a relatively dovish Fed meeting and a weak job report on Friday evening in the US. The benchmark US 10 year bond yield was down 16 bps ending the week at 4.51% from a closing of 4.67% last week. 

Also Read: Index inclusion a game changer for Indian fixed-income markets: Vishal Goenka of IndiaBonds.com

“Global cues continued to exert their influence on Indian markets with Indian bonds reacting to global cues. Value buying picked up at higher yields and with crude oil retracing lower from the recent highs, bonds were well bid most of the week. Inter Bank liquidity eased a bit on the back of incremental government spending and RBI infusing liquidity  through VRR’s (variable rate repos),” said Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.

Moreover, the Government of India (GOI) announced a buyback of short maturity government securities worth 40,000 crore, which Pal believes, has been done to incrementally increase the banking system liquidity. RBI dividend, expected to be in the vicinity of 85,000 crore will further augment the banking sector liquidity.

The Indian OIS curve is now not expecting any rate cuts in India and the yield curve remains flat. 

“We continue to think that scope for rate cuts in India is on account of high real positive rates and the need to encourage private investment and that there is a fair probability of rate cuts in the second half of FY25 though any rate cuts in India will follow rate cuts in advanced economies and will not precede them,” Pal said.

Positive demand/supply dynamics will continue to favour bonds with the inclusion in the JP Morgan Emerging Markets bond index kick starting from end June, he added.

Also Read: How will inclusion of Indian government bonds in the JPMorgan EM debt index impact rupee, bonds? Here's what experts say

On the global front, the FOMC meeting held rates as expected but reduced quantitative reduction (QT) more than expected which led to lower yields. US bond markets have substantially repriced their expectations of rate cuts from the Fed. Futures are now pricing 44 basis points of rate cuts in 2024, according to the LSEG’s rate probability app.

Going ahead, Pal expects long bond yields in India to stabilise over the next few months after the sharp uptick over the course of the last one month and expect yields to drift lower over the course of the next one year. 

“We expect the benchmark 10-year bond yield to go towards 6.50% by Q3/Q4 of FY25,” Pal said.

What should investors do?

Bond yields tend to move in advance of rate action and investors can look to increase allocation to Fixed Income at every uptick in yields.

“Investors with medium to long term investment horizons can consider funds having duration of 6-7 years with predominant sovereign holdings as they offer a better risk-reward currently. Investors having an investment horizon of 6-12 months can consider Money Market Funds as yields are attractive in the 1 year segment of the curve,” Pal said.

He believes Dynamic Bond Funds and Gilt Funds are also likely to do well this year.

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First Published:7 May 2024, 01:24 PM IST
HomeMarketsStock MarketsBond yields expected to drift lower over next one year; What should investors do?

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