How Bond Yields Are Playing Out in the Indian Debt Market - Outside View by PersonalFN

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

  • MyStocks


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

How Bond Yields Are Playing Out in the Indian Debt Market
Sep 8, 2020

Since the RBI's cumulative rate cut by 250 basis points, the repo rate was pushed to 4% and is at a multi-year low. Consequently, the 10-year gsec bond yield has softened. As you know, the bond yields are considered one of the important economic indicators to gauge the trajectory of the country's growth. For the Indian debt market, the yield of 10-year gsec is indicative of a growing economy or the slowing down of it. It moves in tandem with the government policies of borrowing, open market auctions, selling, and its debt load.

When investors buy bonds, they essentially lend bond issuers money. In return, bond issuers agree to pay investors interest on bonds through the life of the bond and to repay the face value of bonds upon maturity. Investors don't usually hold these bonds till maturity , but sell it or trade in the secondary market.

From the time bonds are issued until the date that they mature, they trade on the open market, where prices and yields continually change. As a result, yields converge to the point where investors are being paid approximately the same yield for the same level of risk.

Enhanced risk with such bonds is offset by greater returns, adding to their appeal. Government bonds (Gsec) are relatively more stable, but has low demand due to it long duration of maturity and highly sensitivity to interest rate.

BREAKING: Here's Investment of the Decade

As investors sell bonds, prices drop, and yields increase. A higher yield indicates greater risk. If the yield offered by a bond is much higher than what it was when issued, there is a chance that the company or government that issued it is financially stressed and might be unable to repay the capital.

In fact, the bond yield and prices move in opposite directions. Both act like a seesaw, when the bond price increases, yields goes down and vice versa. This happens largely because the bond market is driven by the supply and demand of capital into the system.

The bond yields fell the most in three months, after the Reserve Bank of India (RBI) announced measures to allay the market fears over rising yields and higher borrowing programmes.

Since the bond price and yields are inversely proportional to each other, the current fall in the yields has favoured the bond prices to make debt fund investment lucrative. The debt funds having a higher maturity that are at the longer end of the yield curve--gilt funds and long-term bond funds benefited the most due to the fall in the bond yields.

Among other debt funds, dynamic bond funds are also being considered as an investment option across durations due to its dynamic nature. Recently my colleague Divya explained in her article, "Long Duration Funds are offering Double-digit Returns. Should You Invest?" the same thing.

--- Advertisement ---
[EXCLUSIVE] Webinar Invitation - "10 Charts, 1 Growth Story - INDIA"

Date: April 23rd | Time: 6pm | Venue: Your Computer

The second wave of the pandemic is here.

But we did beat the first wave, and surely we will beat this one too!

There is a reason why India is poised to be a global superpower soon.

The growth story of India has spanned over the past decades and is only getting stronger.

Hence, it only makes sense for smart investors to have all the information & answers to make the most of India's growth trajectory.

That is exactly what our Live & Exclusive Webinar will cover.

Has Covid Impacted India's Long Term Growth Potential?
What Opportunities Does India's Growth Story Create For You?
Is Equities The Best Way To Play India's Long-Term Growth Story?

And many more...

Click Here to Register FREE for this Exclusive Webinar
[No Payments | No Credit Card | Absolutely FREE]
[Yes! I want to attend this Webinar]


When the yields move down, prices of existing debt funds go up, as the existing securities become more favourable due to higher interest rates. As a result, the NAV of the debt mutual fund scheme goes up when the yields of securities go down.

On September 1, the 10-year bond yield was trading at 5.944%, its steepest decline since 13 May, from its previous close of 6.117%.

Graph: Softening of 10-year gsec Yield

Among several measures which the RBI took do deal with the widening fiscal deficit, rising unemployment levels, drop in GDP, and inflationary pressure the recent announcement of fresh liquidity measures, and a relaxation in mark-to-market to help calm investors' nerves when a sudden spike in yields hit bond markets and pulled the yields down.

The RBI increased limits on bonds held to maturity from 19.5% to 22% of total deposits, the announcement of additional open market operations (OMO) worth Rs 20,000 crore and term repo operations worth Rs 1 trillion to infuse liquidity into the market was made.

In order to reduce the cost of funds for banks, RBI also allowed them to swap the funds raised under long term repo operations (LTRO) at 5.15% with the new funds made available under the 1 trillion repo window at 4%

--- Advertisement ---
[Watch Now] 3 Little-known Stocks We are Super Bullish On

Click Here to Watch Now

What does it mean for the investors?

Even if the bond yields project the GDP growth, but the relationship between yields and economic activity is more complex for the Indian Debt market. A whole host of factors including recessions, inflation, and bank rate set by central banks can have an impact on bond yields.

Currently, the COVID-19 pandemic (with cases continuing to rise), tensions along the Line of Actual Control with China, a 23.9% contraction in India's GDP growth for Q1FY21 (the worst in four decades), weak consumption, a depressing job scenario, overshooting of India's fiscal by 103% in just four months through the fiscal year 2020-21, downgraded sovereign credit rating, and the risk of a global recession are to be looked at for growth of the Indian economy.

The aforementioned factors are pointing that the economy is severely hit and in such troubled times you as an investor must be extremely cautious. Prudently invest to safeguard your capital and gain returns as well.

Although bank FDs would be a convenient choice, but mind you, the returns are taxable and not capable to beat the inflation bug over the years. So, consider debt mutual funds with eyes wide open because they are not risk free at all. Invest in funds that do not undertake high credit risk.

[Read: Why You Need To Be Extra Careful While Selecting Debt Mutual Funds Now]

It would be prudent to stay away from funds with high exposure to private issuers. Invest in debt funds that have a predominant exposure to government bonds or quasi-government papers because these can offer better safety and liquidity.

[Read: Lessons Learnt from the Debt Fund Crisis]

Select schemes based on your financial objective, risk appetite, investment time horizon, and the following factors:

  • The portfolio characteristics of the debt schemes
  • The average maturity profile
  • The corpus & expense ratio of the scheme
  • The rolling returns
  • The risk ratios
  • The interest rate cycle
  • The investment processes & systems at the fund house

At PersonalFN, we arrive at top rated funds using our SMART Score Model. If you wish to select worthy mutual fund schemes, I recommend subscribing to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Author: Aditi Murkute

This article first appeared on PersonalFN here.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "How Bond Yields Are Playing Out in the Indian Debt Market". Click here!


More Views on News

How Did Mindtree Perform in Q4FY21? (Company Info)

Apr 20, 2021

Here's the rundown on the company's latest quarterly results.

Best Balanced Advantage Funds to Invest in 2021 (Outside View)

Apr 21, 2021

PersonalFN explains the outlook for Balanced Advantage Funds and the best Balanced Advantage Funds that can be considered for investment in 2021.

Make More Profits Trading Commodities (Fast Profits Daily)

Apr 21, 2021

In this video I'll tell you why trading commodities will make you a better trader.

Thanks for Being Part of Our Silver Jubilee Celebrations! (Profit Hunter)

Apr 21, 2021

The guiding light of Equitymaster for two and half decades.

TRUSTMF Liquid Fund: Alternate for Your Savings Account? (Outside View)

Apr 20, 2021

PersonalFN analyses the features of TRUSTMF Liquid Fund and explains the potential this fund has to offer to its investors.

More Views on News

Most Popular

India: Recovery Stalled by Vaccine Games? (The Honest Truth)

Apr 13, 2021

Ajit Dayal on how India's vaccine strategy will impact the markets.

A Stock with 700% Return Potential Comes with Additional Payoffs (Profit Hunter)

Apr 15, 2021

Narayana Murthy was one of the first unicorn founders to get the backing of this entity...

11x Bankruptcy to Bluechip Stock: A Rare India Revival Story (Profit Hunter)

Apr 16, 2021

There is no stopping this 11-bagger stock from significant upside.

Top 3 Nifty ETFs to Buy Now (Fast Profits Daily)

Apr 20, 2021

In this video I tell you the three Nifty ETFs I think are the best.

Why Did the Market Crash on Monday? (Fast Profits Daily)

Apr 13, 2021

In this video, I'll you what I think is the real reason behind yesterday's market crash.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Apr 20, 2021 (Close)