Debt Note | A Paradox: Lower Rates & Higher Yields
In the current market context, volatility is on the cards. Most bond fund investors are likely to experience short term pain and may not experience a positive rate of return. Some bond fund investors may not even benefit from lower interest rates. However, there is still a window of opportunity in the short-term space for bond fund investments. We have attractive SIP bond fund investments options that could help you ride out the market volatility.
We’re noticing a slightly odd phenomenon in the bond markets. There is sufficient clarity that interest rates will trend downwards in the short-term. February inflation and IIP numbers are suggestive of a softer stance for interest rates. Yet, we notice that bond yields have not eased.
Bond yields normally react in line with interest rate movements. This means that for debt investors, when interest rates are lowered, yields on their bonds will also fall, causing the rate of return to increase. Bond yields and prices move in opposite directions.
Yields haven’t softened yet because there’s an excess supply of bonds in the market. Recently several quasi government entities have borrowed heavily. And there is speculation that the RBI may reduce bond purchases in the coming financial year.
With election fever setting in and little clarity on the government’s borrowing program, it is necessary to work with a sound debt investment strategy that could improve your rate of return.