10 Year
Benchmark has been trending higher after the credit policy announcement of 29th
October 2013.
Key factors
that drove the benchmark yield to 9% levels:
- Indian rupee has been under performing against the US dollar in the first half of November’13.
- Rs. 75,000 crores of bond supply in November
- Continued FII selling of Indian debt securities.
- Switching to new 10 year benchmark. Market participant have been switching out of current 10YR benchmark (7.16% 2023) and into new 8.83% 2023. This has resulted in narrowing spreads between them from around 30 bps to near parity presently.
We believe
the above factors caused the benchmark yield to rise to 9%.
What’s next?
The chart
given here below of benchmark 10Yr G-Sec (from Nov 2003 to November 2013) makes
a compelling case for investing in bond funds when the yields are hovering
above 9%.(9.05% as on 12/11/2013)
Consider the following data
points:-
Period of observations
|
From
29/11/2003 to 19/11/2013
|
|
Total No.
of observations
|
2512
|
|
No. of
days when 10Yr yield closed above 9%
|
37
|
|
Average
YTM in last 10 years
|
7.48%
|
|
Mean YTM in
last 10 years
|
7.74%
|
(Source: -
DSP Blackrock Mutual Fund)
It is worth
noting that the benchmark closed above 9% only 1.47% of the time i.e. on
37 days out of total 2512 trading days during the last 10 years.
Another perspective of the rare
opportunity:-
Last 10 yr. G Sec yield Range
|
% of occurrence
|
||
5-6%
|
9.47%
|
||
6-7%
|
12.35%
|
||
7-8%
|
44.85%
|
||
8-9%
|
32.16%
|
||
9-10%
|
1.40%
|
A
rare opportunity
|
(Source: - IDFC Mutual Fund)
So when would you invest in bond fund—at a level when
there is maximum occurrence of attractive yields with less scope for making
returns. Or when the occurrence is just 1.40% of the time in last 10 years—thus
presenting good scope for discerning investors to make good returns.
An over view
of the 1 year return generated by bond funds (from say IDFC MF stable when the
yield touched/crossed 9%
From
|
15/07/2008
|
01/08/2008
|
14/11/2011
|
To
|
14/07/2009
|
31/07/2009
|
13/11/2012
|
10 Yr. G Sec
yield on from date
|
9.47%
|
9.26%
|
8.97%
|
Returns
generated by
|
|||
IDFC
Dynamic Bond Fund
|
19.12%
|
18.33%
|
11.99%
|
IDFC
SSIF—IP
|
13.48%
|
13.16%
|
10.71%
|
(www.valueresearchonline.com)
The current
yield of 9% is like an index level of 15000 on Sensex. What should be the
correct strategy at such levels---redeem or invest more?
Conclusion:-
Risk reward ratio is in favour of
investors who invest in bond funds at present yield levels. A limited period discount offer is presently
open.
Recommendation:-
We strongly
recommend investments in bond funds at the current 9% YTM of benchmark 10Yr. G Sec.
Following are our recommendations:-
·
IDFC Dynamic Bond Fund
·
IDFC SSIF—MT
Opportunity
favours the prepared mind. We are prepared. Are you?
