Combination of liquid, money market funds to do well in short term: Report

The fund house said the allocation to short-term debt funds and/or dynamic bond funds with low credit risk should remain as core fixed income allocation.

The selloff in the bond market, most recently in September, continued into October. During the month, the 10-year benchmark government bond yield (Gsec) rose 17 basis points to 6.39% on October 29 from 6.22% on September 30.

Since September 20, the 10-year government bond yield has increased by a cumulative 24 basis points. On the low end, the impact was even more pronounced as yields on government bonds with one- to three-year maturities increased by about 35-40 basis points during the same period.

“Most of the sell-off can be attributed to two developments, a sharp rise in crude oil price and normalization of liquidity operations by the Reserve Bank of India (RBI),” said Pankaj Pathak, Fund Manager-Fixed Income, Quantum Mutual Fund.

Crude oil prices have been rising for the past two months due to a pick-up in global demand and restricted supplies by oil producer cartels – OPEC and Russia. The price of Brent oil is up 18% over the past two months and is hovering near its 2018 peak of $86/barrel.

Pathak believes crude oil prices will remain under pressure if supplies are not raised quickly, which poses risks to Indian bonds.

“Although the macro background is unfavourable, the valuations on both the short and long sides of the curve have improved significantly after the sell-off. We particularly like the three- to five-year segment of the government bond market which, in our opinion, is already pricing too high for the start of a cycle of liquidity normalization and rate hikes by the end of this year. Is. Given the sharp bond yield curve, three- to five-year bonds also offer the best roll-down potential,” said Pathak.

Additionally, in the long maturity segment, the current yield levels look good with the view that the terminal repo rate may remain well below its pre-pandemic normal levels this cycle.

“However, we are restricting investments in the long segment due to the risk of rising crude oil prices and absence of RBI’s assured buyback,” the expert said.