Steady supply of government securities by way of primary auction every week, RBI's cautious tone at the last monetary policy review and sharp rise in global bond yields have been the main factors for increase in G-Sec yields, said Bekxy Kuriakose, Head- Fixed Income at Principal Mutual Fund.
In an interview with Sourabh Pandhare, Bekxy Kuriakose said, 'At current levels we think it makes sense to remain invested (in the government bonds).' Interview Excerpts:
Recently, the RBI has announced reduction in repo rate by 25 basis points. Will the central bank adopt status quo on policy rates in reminder of 2015 on concerns over likely increase in inflation?
It depends on the future trajectory of CPI. In our view it is possible that RBI maintains status quo given global risks and volatility in domestic food prices should monsoon be sub normal.
Rupee has moved down to 64 levels against US dollar. Do you think the currency will depreciate further?
Rupee's movement can be impacted by strength in dollar index and any flight to safe haven assets by foreign investors. Given the higher inflation as compared to US, rupee should gradually depreciate however its preferred status among emerging market economies may still keep it relatively more resilient.
In the last three months, G-Sec yields moved up sharply to nearly 8% level. What is driving yields higher? How do you see movement of G-Sec yields over next 6 months?
Steady supply of government securities by way of primary auction every week, RBI's cautious tone at the last monetary policy review and sharp rise in global bond yields have been the main factors. At current levels we think it makes sense to remain invested.
How do you see movement of corporate bond yields over next 6 months?
Corporate bond yields should move in tandem with movement in gilt yields for the AAA/ AA segment. However high yield corporate bonds would move depending on evolving credit fundamentals and vary from company to company.
Money market rates, on the other hand, recorded a steep drop in yields in the last three months? Do you think, fall in money market rates to continue?
I think the cuts in key rates have been factored in the fall in money market yields coupled with demand for short end assets and easing liquidity conditions. We expect money market yields to remain range bound going forward unless there is further rate cut.
In 2014, Principal Government Securities Fund and Principal Income Fund - Long Term Plan have delivered returns of 15.65% and 14.33% respectively. Do you think returns will remain in double digits in 2015?
It would be difficult to replicate this kind of returns in 2015 as we may not see same scale of fall in government and corporate bond yields.
What is your advice to short-term and long-term investors at this point in time?
Short term investors who are underinvested in duration should look to allocate to duration funds. Long term investors should remain invested.