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Business News/ Markets / Stock Markets/  Fixed-income portfolio rebalancing on card as global monetary tightening cycle ends
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Fixed-income portfolio rebalancing on card as global monetary tightening cycle ends

While a pause in the global tightening cycle provides stability, astute investors can strategically position themselves in duration-focused funds to capitalize on potential opportunities arising from the flattening yield curve and the expected decline in long-term bond yields.

The Reserve Bank of India (RBI) will be on a long pause and is expected to cuts rate only in Q3 of CY2024,Premium
The Reserve Bank of India (RBI) will be on a long pause and is expected to cuts rate only in Q3 of CY2024,

The global monetary tightening cycle has ended, ushering in a prolonged pause in interest rate adjustments. The fixed-income investors need to assess their portfolios in light of the changing global and domestic monetary landscape. 

While a pause in the global tightening cycle provides stability, astute investors can strategically position themselves in duration-focused funds to capitalize on potential opportunities arising from the flattening yield curve and the expected decline in long-term bond yields.

Markets tend to react before the start of a rate cutting cycle and analysts believe the current yields offer a good opportunity for investors to increase their allocation to fixed income as slowing growth and moderating inflation is likely to lead to rate cuts in 2024.

Also Read: High time India Inc picks up the baton to further capex: RBI bulletin

"Bond yields tend to move in advance of rate action and investors can look to increase allocation to Fixed Income as we expect long bond yields to keep drifting lower and expect the benchmark 10-year bond yield to go lower towards 6.50% by Q2/Q3 CY24," said Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.

The Indian bond market gave up some of its exuberance on the back of higher global bond yields but remained bullish with the longer end of the curve outperforming decently.

On Wednesday, the Indian government bond yields trended down, led by recent foreign buying, while no fresh supply for the rest of the financial year also aided sentiment.

The benchmark 10-year yield was at 7.0406%, the lowest since February 2. On the other hand, the 10-year U.S. yield was around 4.30%, as hopes of imminent rate cuts ebb. The odds of a Fed rate cut in May are down to 37%.

Also Read: India set for strong growth in FY25 amid global headwinds: Finance ministry

Analysts believe that the Reserve Bank of India (RBI) will be on a long pause. They expect rate cuts only in Q3 of CY2024, but also believe RBI can change its monetary policy stance to ‘Neutral’ before the commencement of rate cuts. 

The yield curve has flattened and can continue to stay flat given the positive demand/supply dynamics and rate cut prospects going into FY25.

Pal suggests investors with medium to long-term investment horizons can consider funds having a duration of 5-6 years with predominant sovereign holdings as they offer a better risk-reward currently. 

“Investors having an investment horizon of 6-12 months can look at Money Market Funds as yields are attractive in the 1-year segment of the curve. Dynamic Bond Funds and Gilt Funds are also likely to do well with a fall in long-end bond yields in anticipation of a rate-cutting cycle starting later this year," Pal said.

Meanwhile, the US bond market is currently pricing in about 80 bps of rate cuts through the year-end compared to around 140 bps of rate cuts at the start of the year. The current pricing of rate cuts by the bond markets is more in line with the US Fed’s forecast.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 21 Feb 2024, 12:05 PM IST
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