As rates have peaked, or are near the peak, investors in fixed income markets can lock in these higher interest rates for reasonable certainty of better returns.
As RBI monetary policy continues to be hawkish, joining central banks across the globe in raising interest rates to combat stubborn inflation, the yields and returns on debt and fixed-income securities have seen a sharp upward turn. In a conversation with FinancialExpress.com, Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Life, said that for investors who will commit to staying invested, locking in higher yields now during the peak of the interest rate cycle will be beneficial.
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What is the outlook on bond yields, why are they seeing a steady rise?
The debt markets are cyclical, said Bhatt, “They are guided by central banks.” As a result of the pandemic related disruption, the RBI had to ease their policy, bringing down rates. Following the abatement of the pandemic, rates had to be scaled back up and then some more, to counter the adverse effects that the dovish monetary policy had on the local economy. This led to one of the fastest rate-hike cycles, not just from RBI, but from central banks across the globe. Churchil Bhatt predicted that the RBI’s rate hike cycle has culminated. As rates have peaked, or are near the peak, investors in fixed income markets can lock in these higher interest rates for reasonable certainty of better returns.
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As an investor, what debt instruments should investors look at to lock in these yields?
In terms of credit profile, Bhatt recommended state government bonds which offer returns commensurate with corporate bonds, but carry much less inherent issuer risk. He added that while rates might be at their peak, not all fixed income assets are equally attractive. Credit spreads are not the most attractive at the moment. Once there is normalisation, where the difference in the yields between corporate and government bonds widens, that is when credit spreads will look reasonable again. He added that debt mutual funds, REITs or debt AIFs are alternative methods of investment that can help an investor enjoy the current interest rate over a longer period of time.
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What is the timeframe for these investments?
The debt market rewards investors who time the market with reasonable accuracy. Investors should put their money into fixed-income securities as repo rates are higher, following which, the investors should remain patient. For investors who will not intermittently withdraw their funds and stay invested over the tenure until maturity, fixed income definitely offers a reasonable certainty of returns. While India has a very savings friendly population, with a large percentage of the population allocating their funds to fixed deposits, very rarely do FDs have a long tenor. To lock in these favourable yields, bonds or insurance are a good option, said Bhatt. He preferred 15- to 20-year bond options instead of a longer-term bucket. He added that the 5- to 7-year government securities are looking attractive, especially since the yields of 30-year bonds are flattening, trading within a 10 bps range of 5-year and 10-year bonds.
