10 yr G-Sec yields have fallen below the 7% threshold in response to the large RBI dividend which will accrue to GoI. Puneet believes this may not result in a drop in Govt borrowing as GoI will likely spend the incremental Rs. 1 lakh cr in stepping up infra spending – which is positive for the economy but does not mean lower yields.
Puneet believes we might see only 1 rate cut of 25 bps this fiscal and 1-2 more in 1 HY next fiscal, totaling 50-75 bps over the next 12 months. He sees the 10 yr G Sec yield dropping to 6.5% within the next 6-9 months as the rate cut cycle commences.
PGIM India’s corporate bond fund currently runs a duration of around 2.58 yrs and has a YTM around 7.65%. Puneet says he can take duration up to 4-4.5 yrs in the coming 6 months to capitalize on an expected fall in yields.
Their dynamic bond fund’s duration has been tactically managed between 6-7.5 yrs in recent months. Puneet believes it can go up to about 8-8.5 yrs in the coming few months in anticipation of commencement of the rate cut cycle.
Funds with longer durations (dynamic bond funds and long duration funds) typically react most before a rate cut while intermediate duration funds (corporate bond funds) react at the time of rate cuts.
Investors with adequate time horizon and risk appetite should consider a mix of 70% dynamic bond funds and 30% corporate bond funds now and once the rate cuts cycle commences, they can switch it the other way around – 30% in dynamic bond funds and 70% in corporate bond funds.