Compelling case for investment in bond funds

10 Year Benchmark has been trending higher after the credit policy announcement of 29^th 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?