Bond yields surge, time to lock high returns; here’s how to choose debt securities, duration, allocation

Bond yields surge, time to lock high returns; here’s how to choose debt securities, duration, allocation

Bond yields in India across categories are on the rise, making it an ideal time to foray into debt investment, according to market experts. Yields have spiked by 30-45 bps across various types of fixed-income assets over the past few months as India’s central bank hiked its repo rate, leading India’s 10-year government security yield to 7.418%, Axis MF said in a note earlier this week. There is a general consensus that the RBI is nearing its rate-hike cycle peak, therefore putting the debt market in a sweet spot, where higher yields can be locked in for better returns over a longer period.

Patient investors could consider investing money into fixed-income securities, as the repo rate is high. Fixed income definitely offers a reasonable certainty of returns for investors who would not intermittently withdraw their funds and stay invested over the tenure until maturity, said Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Life.

Timeline for investments

Prableen Bajpai, Founder, FinFix, said that broadly, debt funds have an advantage over any other fixed income products available. Given the current yields, debt mutual funds ranging from one year to ten years look attractive, since there is relative certainty of returns as well. However, Churchil Bhatt and Axis MF don’t concur with the ultra short-term view, instead both chose to opt for medium term buckets.

Axis MF retained their stance of adding duration to portfolios in a staggered manner given that a large uncertainty driving rates and duration calls is now out of the way. “For investors with a medium term investment horizon, we believe the time has come to incrementally add duration to bond portfolios. This however does not imply approaching the extreme long end of the yield curves as inherent volatility could be a factor in the near term,” Axis MF said.

It expects the yield curve to remain flat for the majority of 2023, leading long bonds to trade in a 7-7.5% range on falling CPI, weaker growth and strong investor demand, which would keep yields under check despite high government securities supply next year.

Bhatt of Kotak Life preferred 15- to 20-year bond options instead of a longer-term bucket. He added that the 5- to 7-year government securities also look attractive, especially since the yields of 30-year bonds are flattening, trading within a 10 bps range of 5-year and 10-year bonds. Since the yields are so close to each other, Bhatt said the attractiveness of duration has been erased. He further stated that due to the rare market conditions, investors may be overweight on debt in their portfolios.