Bond rally: Too good to last? - 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?  

Bond rally: Too good to last?

Nov 30, 2001

The cheap money policy being pursued by the Reserve Bank of India (RBI) has seen bonds/gilt (government securities) yields falling dramatically (i.e. bond prices are moving upwards). Over the last few weeks, government securities (gsecs/gilts) have been witnessing a very robust rally. Maybe a little too robust, for RBI's comfort. The RBIís Rs 65 bn gilt offering of 3 different maturities (11.50% 2011, 11.43% 2015, 10.18% 2026) had sucking the liquidity off the system as one of its objectives. Market sources believe that the RBI was trying to test the waters with varying paper of maturities and also apply the brakes in the over-heated gilt markets.

Will there be a correction?
GILT FUNDSNAV (Rs)1-MTH6-MTH1-YRINCEP
TEMPLETON GSEC G 16.1 7.2%17.7%34.3%21.6%
BIRLA GILT LT G 15.2 6.7%17.1%33.2%21.6%
DSP ML GSEC A G 15.3 7.0%17.0%32.8%21.4%
PRU ICICI GILT IG 15.1 6.3%16.2%30.1%19.6%
ZURICH SOV GILT PT G 13.1 4.9%15.1%25.9%16.3%
ALLIANCE GSEC LT G 1,347.3 3.6%12.9%21.4%15.7%
Returns over 12 months are annualised

Market sources believe that the current rally in gilt prices is unsustainable and at some point the RBI may intervene to cool it down a bit.

Investors in gilt/bond funds need to get realistic too. All good things must come to end, and the runup in bond prices is a little too good to last.

There are several factors (global and domestic) that could go against the current situation. For one, oil prices could firm up in case the war in Afghanistan were to escalate. Also, with excess liquidity in the system, and a likely pick up in agriculturally led economic growth, a change of stance by the Reserve Bank of India towards its easy money policy cannot be ruled out. Inflation is low right now, but there is no reason to believe that its going to remain that way.

Fresh investors in gilt/bond prices should wait a little for the correction that is likely to happen over the next month or so and then enter these funds. Existing investors have seen a sharp appreciation in the value of their investments in recent months. It may now make sense to book a part of the profits.

If you are in Mumbai and are interested in investing in mutual funds or other investment products, please register here.


Equitymaster requests your view! Post a comment on "Bond rally: Too good to last?". 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.

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...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

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