Indian Market (Debt & Currency)

The Reserve Bank of India on Friday announced the cut-off yield for the new 10-year bond at 6.10% per annum, higher than that of the current benchmark, signalling a slight tolerance for a higher yield after months of trying to keep it at 6% or less.

RBI sold ₹14,000 crore of the new 2031 bond as part of the ₹26,000 crore planned weekly government security auction. The previous 10-year benchmark paper has been trading in the secondary market at around 6.18%. Since 28 May, the 10-year paper has either seen a devolvement of large bids or cancellation of the instrument.This was the first auction after May 21 when there was no devolvement of bids to primary dealers or a greenshoe option exercised for any instrument. (HT) ICICI Direct has advised its clients to invest in long dated G-Sec to manage reinvestment risk in debt portfolio. In a thematic report, the brokerage highlighted that “The re-investment risk in fixed income is highly underrated. The structural decline in interest rates across the board in the last few years in fixed income products like debt mutual funds, bank deposits, company deposits, NCDs, tax free bonds, etc, has brought to the surface again this important aspect of fixed income investing. Fixed income instruments
like debt mutual funds, company fixed deposit, NCDs, etc, have delivered around 8.0-10.0% annualised return from 2018 to 2020. This return has turned lower in the range of 5.5-6.5% currently as overall interest rates declined. Investors are grappling with lowerreturns across debt products currently and may find it difficult to achieve their planned financial goal.

For most investors, fixed income portfolios, in general, predominantly have allocation to rotating maturity profile products like debt mutual funds or bank deposits having maturity of one year to five years. This lends re-investment after the maturity is over or interest rate decline in that maturity profile. To diversify, the overall portfolio should always have allocation to long-term maturity (10-15-20 year) profile products that does not get impacted by interest rate movement and is in line with investment goals like retirement planning. Accordingly, we believe that long dated 20-30 year government securities offer such allocation option.

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Author: Midas Finserve

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