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Following the volatility in the rupee’s value against the dollar, fixed income fund managers have increased their cash holding in long-term funds. Negligible in early April, this proportion has gone up to about 20 per cent, indicating they’re bearish on the market and are holding back on purchases.
The volatility in the rupee’s value began in May and has resulted in a 12 per cent slide since early April. The outlook remains bearish and the Street awaits clear measures from the government to arrest the fall. The weakening is a cause of concern for the bond market, as yields have been rising.
“Yes, our cash holding as a percentage of assets under management in our long-term income fund has gone up in the current month as compared to the beginning of April at four to eight per cent and around 12 per cent in May. Currently, it’s around 20 per cent. The heightened volatility since mid-June in government securities and bond yields due to the global scenario, both in terms of US treasury yields and the rupee, has been the main factor,” said Bekxy Kuriakose, head of fixed income, Principal PNB Mutual Fund.
The yield on the 10-year benchmark 7.16 per cent government bond ended at 7.54 per cent on Friday, compared with Thursday’s close of 7.47 per cent. The yield was at 7.16 per cent on May 17 when auctioned for the first time by the Reserve Bank of India (RBI).
“In bond funds, cash holdings have gone up as the idea is to reduce average maturity. The average maturity in long-term funds was in the vicinity of 10-12 years in January; currently, it might be five to seven years,” said Suyash Choudhary, head-fixed income, IDFC MF.
Fresh purchases in bonds seems unlikely in the near future. “Fund managers are now taking a wait and watch approach. They will take into account the moves of the government toward the rupee and how RBI monetary policy unfolds,” said Dwijendra Srivastava, head of fixed income, Sundaram MF.
The volatility in the rupee’s value began in May and has resulted in a 12 per cent slide since early April. The outlook remains bearish and the Street awaits clear measures from the government to arrest the fall. The weakening is a cause of concern for the bond market, as yields have been rising.
“Yes, our cash holding as a percentage of assets under management in our long-term income fund has gone up in the current month as compared to the beginning of April at four to eight per cent and around 12 per cent in May. Currently, it’s around 20 per cent. The heightened volatility since mid-June in government securities and bond yields due to the global scenario, both in terms of US treasury yields and the rupee, has been the main factor,” said Bekxy Kuriakose, head of fixed income, Principal PNB Mutual Fund.
The yield on the 10-year benchmark 7.16 per cent government bond ended at 7.54 per cent on Friday, compared with Thursday’s close of 7.47 per cent. The yield was at 7.16 per cent on May 17 when auctioned for the first time by the Reserve Bank of India (RBI).
“In bond funds, cash holdings have gone up as the idea is to reduce average maturity. The average maturity in long-term funds was in the vicinity of 10-12 years in January; currently, it might be five to seven years,” said Suyash Choudhary, head-fixed income, IDFC MF.
Fresh purchases in bonds seems unlikely in the near future. “Fund managers are now taking a wait and watch approach. They will take into account the moves of the government toward the rupee and how RBI monetary policy unfolds,” said Dwijendra Srivastava, head of fixed income, Sundaram MF.
RBI will review the monetary policy later this month and the Street is not expecting a change on key policy rates. “With the renewed depreciation pressure on the rupee and external sector risks likely to become a predominant concern of RBI, rate cut expectations will need to get pushed back,” said Choudhary.
Status quo by RBI in key policy rates will lead to bond yields moving up further. Besides, foreign institutional investors have been selling their holdings in domestic debt as US bond yields are becoming more attractive for them. In the current financial year, RBI has cut the its prime lending rate just once, by 25 basis points in May. It is currently 7.25 per cent.
