Which debt mutual funds to bet on as bond yields spike after Budget?
1 min read 02 Feb 2022, 02:31 PM ISTHigher than expected government borrowing programme can have negative impact on bond yields, say experts
PremiumThe revised Fiscal Deficit in the current year is estimated at 6.9% of GDP as against 6.8% projected in the Budget estimates, as announced by Finance Minister Nirmala Sitharaman. This may lead to higher-than-expected government borrowing programme that can negative impact on government bond yields, predict experts.
“Higher government borrowing requirements will cause trustees and banks to sell off government securities. As a result, increase in interest rates will have an impact on existing bonds, causing long-term bond prices to decline, lowering the NAV of Debt Funds. Low-maturity funds, such as floating funds, will purchase new bonds and earn the new interest rate. However, compared to an investor whose goals are due in a few months, the impact on a long-term investor who holds the funds until average maturity may be little," said Ashis Sarangi, SEBI registered RIA at Pickright Technologies.
The debt market expected resolution of tax treatment of bonds to facilitate inclusion in the global bond index. The higher borrowing and no mention of resolution of tax issues for global bond fund inclusion spooked the markets, as per experts.
"This budget has not materially reduced fiscal deficit even thought and global background is of rising yields due to higher inflation. Given this high borrowing programme, normalization of rates by RBI to control inflationary pressure is now in question. This may create a anomaly with short term rates being anchored due to lower rates and high liquidity while the long end of the yield curve reacts to supply pressure in the economy." Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund.
Benchmark bond yield surged as the government announced increased borrowings in its 2022-23 budget, while a plan to boost spending to revive the pandemic-hit economy lifted the stock markets.
“RBI may need to re-introduce measures such as OMO purchases, etc. to manage yields. The 10-year benchmark Gsec yield may continue to trade at elevated levels in absence of any intervention by RBI," said Dhaval Kapadia, Director – Managed Portfolios, Morningstar Investment Advisers India.
