ETMarkets Smart Talk: Bond yields may rise further over the next few months
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In this episode of ETMarkets Smart Talk, Suyash Choudhary, CIO–Fixed Income at Bandhan AMC, explains why Indian bond yields could rise further over the next few months and why investors should avoid aggressive bets on duration and credit risk.
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Loading...×Indian bond markets are facing renewed pressure as rising global real yields, persistent commodity price pressures and intensifying demand for capital reshape the interest rate outlook.With the US Federal Reserve potentially looking at further rate hikes and expectations of higher domestic interest rates building, investors may need to rethink their fixed-income strategies.
In this episode of ETMarkets Smart Talk, Suyash Choudhary, CIO–Fixed Income at Bandhan AMC, explains why Indian bond yields could rise further over the next few months and why investors should avoid aggressive bets on duration and credit risk.
Bonds Corner Powered By ETMarkets Smart Talk: Bond yields may rise further over the next few months; avoid aggressive duration and credit bets: Suyash Choudhary
In this episode of ETMarkets Smart Talk, Suyash Choudhary, CIO–Fixed Income at Bandhan AMC, explains why Indian bond yields could rise further over the next few months and why investors should avoid aggressive bets on duration and credit risk.
Bond market is a buy right now, JP Morgan Asset Management's fixed income head saysIndia bonds give up gains as high oil prices weighChina's central bank sets up non-bank financial institution bond market swap facilitySumitomo Life to remain cautious on JGB yields, keep investment pace unchanged from H1 Browse all Bonds News withHe discusses the implications of the Fed’s policy trajectory for Indian markets, the influence of global capital flows on RBI’s policy choices, and how investors should navigate the choice between fixed deposits, government securities and debt mutual funds.
He also shares his assessment of the sharp September outflows from debt mutual funds and whether the current rise in yields offers an opportunity to invest in longer-duration funds. Edited Excerpts –
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Q) We have seen bond yields rise, liquidity tighten and expectations around the RBI's next policy move shift. What has fundamentally changed in India's fixed-income market over the past few weeks?
A) Global real yield settings have been moving up reflecting the intensified competition for capital over the past few quarters. This in turn is owing to the funding demand for AI infrastructure buildout, reflected as a massive pick up in private sector capital spending.
It must be remembered that this pick up is happening when underlying levels of government fiscal deficits in key advanced economies have already been quite high. Indian bond yields are also reflecting this dynamic.
The other source of pressure on Indian bonds is from the broad-based commodity price pressures emanating from the West Asia war as well as extremely volatile weather conditions.
This combination, higher global real yields and wide-spread local inflationary pressures, are both leading Indian interest rate expectations higher. One may argue that, though the manifestation is more obvious over the past few weeks, the sources of pressure have in fact been building over the past few quarters.
Q) Given the October 27–28 policy meeting. Looking beyond this week's meeting, what is your base case for the Fed's policy trajectory through the first quarter of 2027, and what developments could change that outlook?
A) The US economy has been holding well, and at higher levels of average growth than what has historically been considered trend rate by the Fed.
The underlying drivers have been shifting but the continued expansion, especially in the face of a large commodity shock, is giving more room to the Fed to focus almost exclusively on its inflation mandate for the time being.
The context also is of having missed the inflation goal for the past five years and the fact that stronger growth alongside commodity price pressures may also be raising potential inflation risks. Given this, we do expect that the Fed will be able to go through with 50 bps more of rate hikes which is broadly in line with current market pricing.
If the AI roll out were to see a large downturn for whatever reason, that would have widespread effects on growth drivers which in turn may potentially change outlook on the Fed.
Read more: PMS Talk: AI, defence and electronics manufacturing are the next growth engines, says Vaibhav Agarwal
Q) Could a more hawkish Fed trigger further pressure on the rupee and foreign portfolio flows into Indian debt, even if the RBI keeps domestic rates unchanged?
A) In our view, the source of pressure on the rupee and capital flows is the intensifying demand for global capital for reasons mentioned above. This predates the recent more emphatic turn towards hawkishness by the Fed though, admittedly, this turn doesn’t help the situation.
If global real neutral rate setting has indeed moved up, and this does seem to us to be the case, then our domestic policy rates must also take this into account.
Put another way, even as domestic considerations may guide policy setting, the degrees of freedom available to RBI as well as what forward looking real policy rates should look like, are very much influenced by global factors.
Not taking these into account sufficiently will lead to large divergences between actual financial conditions in the market versus what RBI is trying to set via its monetary policy.
Q) How should investors choose between fixed deposits, government securities and debt mutual funds?
A) What matters in fixed income investing first and foremost is the choice of how much duration and credit risk to run. The choice of instrument can then be made basis ease of investing, liquidity, and diversification available etc.
For the time being, our view is that one should be conservative on risk (both duration and credit) as a stable equilibrium, considering the global factors as discussed above, seems still not in place.
Read more: PMS Talk: How Rs 50 lakh invested in Karma Capital in 2006 grew to Rs 5.4 crore
Q) What is your outlook for interest rates and bond yields over the next three to six months?
A) Should the current themes of strong competition for global capital alongside widespread pressure on commodity prices sustain, we think Indian interest rates still have some upward adjustment left over the next few months.
Q) What is the one fixed-income strategy investors should avoid in the current environment?
A) Aggressive risk, either via duration or credit or both, should be avoided in the current environment.
Q) Debt mutual funds saw outflows of ₹1.83 lakh crore in September. Should investors interpret this as a loss of confidence in fixed income, or was it largely a temporary liquidity-management phenomenon?
A) This only reflects seasonal factors for the most part.
Q) Should investors favour short-duration and money-market funds in the current environment, or does the rise in yields create an opportunity to gradually lock into longer-duration funds?
A) Should factors as discussed above sustain, we expect market yields to be higher over the next few months.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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