Bond yields shoot up after S&P downgrade

NEW DELHI: The S&P downgrade has trigerred panic in the bond market, with the 10-year benchmark bond yield shooting up to 8.604%. Rising bond yields imply that the price of bonds in the secondary debt market has fallen. The benchmark yield had dropped from a high of 8.78% on 5 April to touch a low of 8.365% on 17 April after the RBI cut the repo rate by 50 basis points. But bond prices moved down again last week, pushing up the yields. The latest development has further dented the sentiment in the debt market and depressed bond prices.

Rising yields is bad news for debt funds that are holding long-term bonds because the value of their holdings falls, bringing down their . Experts say that small investors should invest in short-term debt funds. Short-term debt funds have given fairly decent returns in the past one year, with the average fund giving 9.5%. On the other hand, some long-term debt funds have lost more than 1-2% in the past one week. “Short-term funds are less volatile,” points out Mahendra Jajoo, executive director and chief investment officer, fixed income, Pramerica Mutual Fund.

Jajoo says that if they want to bet on a possible cut in interest rates, small investors should opt for dynamic bond funds that invest in a mix of short- and long-term bonds. These actively managed debt funds have done well despite the rise in yields in the past three months. The best performing long-term debt fund, the Kotak Gilt Investment Regular, has earned 11.25% in the past one year, thanks to the active churning of the portfolio. “This is not a trending market but a trading market. The maturity of the holdings is dynamically managed,” says Lakshmi Iyer, head of fixed income and products, Kotak Mutual Fund.