Will Indian bond markets succumb to the global sell-off?

The hawkish monetary policies of central bankers pushed the global bonds into their first bear market ever last month.

The Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds has dipped over 20% below its 2021 peak, the biggest drawdown since its 1990 inception.

While bear markets are common in equities, they have been unheard of in bond markets as the asset class emphasizes reliable returns over a period of time. 

Bond prices are inversely related to bond yields. And as money market watchers factor-in higher interest rates, especially after last Friday’s solid jobs report in the US, yields on US treasuries are set to climb further. 

They are already near 4%, their highest level since October 2008. In comparison, yields were around 1.7% at the beginning of 2022.

Back home, too, analysts are cautious on the returns expected from Indian government securities. However, the sell-off in Indian bonds hasn’t been as cruel as seen in the global markets.  

From their last year’s peak, the Nifty 10-yr G-Sec index had fallen around 5.5% till June this year. The index climbed again, only to resume the sell-off mid-September onwards.

“A lot of factors are going against the Indian bond market. Elevated inflation, continued monetary tightening by the RBI, sharp reduction of system liquidity, and record-high bond holding by banks, which may result in subdued demand and/or bond sell-off by banks, are key overhangs,” says Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers.

That said, analysts believe the marginally lower-than-expected H2FY23 borrowing program will provide some relief to the bond markets.

Moreover relatively less hawkish Indian monetary policy, steady buying of bonds by banks despite excess holding, much better tax receipts could support the domestic bond markets on a relative basis.

Economists see yields on 10-year G-Sec rising to 7.5%-8% by March 2023.

Against this backdrop, how should fixed income investors shape their portfolios?

Mohamed Irfan, Fund Manager, Vivriti Asset Management says one should actively cut ‘duration’ in bond portfolio and avoid exposure to open-ended scheme. Evaluate ‘accrual’ strategy, he suggests. 

Irfan of Vivriti AMC suggests investing in corporate bonds of companies having strong domestic linkages, or those that have less exposure to imports or currency fluctuations. 

In nutshell, while the downside risks outweigh the upside possibilities in bond markets, the outlook for domestic G-Sec look relatively robust versus most global peers.

On Tuesday, investors will react to Q2 earnings of TCS, and eye oil prices, bond yields and IPO of Tracxn Technologies.