MF investors skip G-sec rally on rate-cut gloom

Gilt funds witness redemptions as yields soften

Debt mutual fund investors have missed the opportunity to ride on a rally in gilts. Investors were busy withdrawing their money in January-June as the yield on the benchmark gilt hit a three-year low.

The yield on the 10-year gilt has declined from 7.76 per cent in December, 2015  to 7.34 per cent on July  12 (Tuesday) but gilt funds saw a net outflow of Rs 2,824 crore during the period. The total assets under management of these schemes declined nearly 11 per cent, from Rs 17,463 crore in December to Rs 15,568 crore in June. The number of investor accounts fell five per cent.

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.