High gilt yields will hit funds - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

High gilt yields will hit funds

Jun 27, 2000

Bond/gilt markets have already factored in a interest rate hike, which is more than apparent in the shorter term gilt prices. Thatís not good news for gilt funds. It does not take an Einstein to figure out the likely interest rate scenario in the shorter term i.e. 6-12 months. The Reserve Bank of Indiaís (RBI) predicament is understandable, given the weakening rupee and inflationary concerns. So now its more a question of when rather than if. What does that mean for gilt fund managers? It does not take an Einstein to figure that out either. A hike in gilt yields will suppress net asset values (NAVs) of gilt funds, making them very unattractive. But first gilt yields. As the table below indicates gilt yields have declined over the past few months.

Yields on Govt. Sec. (Gilts)
Maturity Minimum YTM (%)
(Indicative)
4-Feb-00 9-Jun-00
2000-01 7.46 9.05
2001-02 9.68 9.26
2002-03 9.89 9.59
Source: RBIís Weekly Statistical Supplement

The rise in gilt yields (2000-01) in the short term is an indicator of the negative sentiment on the interest rate scenario. There seems to be some kind of a consensus on an interest rate hike. However, a decline in gilt yields on longer term securities (2001-02, 2002-03) underlines a positive sentiment as far as interest rates are concerned, as dealers do not expect the hike in interest rates to be sustained over that period.

This makes gilt funds unattractive at current levels, and this more than reflected in the returns of most gilt funds over the last few months. However, regardless of the returns, nothing can compare to gilt funds as far as credit risk is concerned, even if the interest rate risk suppresses returns (as is apparent currently). However, investors looking to combine the high returns of a bond fund with the credit risk profile of a gilt fund can target bond funds with a relatively higher exposure to gilts.


Equitymaster requests your view! Post a comment on "High gilt yields will hit funds". Click here!

  

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS