Fund managers were of the view that long gilts looked unattractive as the curve was flat beyond 15-20 years. With expectations of further rate cuts by the Reserve Bank of India (RBI) at least more than a quarter away, fund managers had shifted away from gilts to corporate bonds. The credit spreads had widened to around 70 basis points (a basis point is a hundredth of a percentage point) over sovereign bonds, making commercial paper attractive.
With rising global uncertainty as Brent crude traded at $50 a barrel, the market expectation of a repo rate cut shifted to August. To protect the portfolio, fund managers shifted from gilts to corporate bonds.
Last month’s gilt rally caught fund managers on the wrong foot. Short-term gilt funds have returned 10.23 per cent in the past year while medium- and long-term funds have returned 9.98 per cent, beating nearly all schemes across asset classes barring gold.
“Yields have fallen by 40-50 basis points in developed countries after Britain voted to exit the EU. However, the domestic 10-year gilt yield has fallen from 7.44 per cent to 7.34 per cent. We expect RBI to cut interest rates by 50 basis points in the current financial year, which should take the 10-year gilt yield to 7.0-7.1 per cent,” said Murthy Nagarajan, head, fixed income, Quantum AMC.
“Improvements in the liquidity situation and plummeting money market yields are creating a demand for medium to long maturity bonds. The monsoon is expected to moderate food inflation. Foreign investors’ demand for Indian gilts is expected to increase with dropping yields in most markets globally,” said Sujoy Das, head of fixed income at Invesco Mutual Fund.