Bond Not The Best

Rising yields mean bond fund portfolios will be under pressure for a considerable time period.

- Jigar Pathak

Rising bond yields and the resulting treasury losses are telling on profitability of banks. Yield on the benchmark 10-year government securities (G-sec) surged 67 basis points (bps) during the third quarter due to fiscal worries. To be sure, these are mark-to-market, or MTM, losses on investment portfolios that can be reversed if the yields correct. But experts think there is a larger concern. “Banks are not actively participating in the market. This is driving up yields,” says Dwijendra Srivastava, who oversees around ₹18,000 crore in various debt schemes as Chief Investment Officer, Debt, Sundaram Asset Management Company.

Once Bitten, Twice Shy

The one-side movement of bond yields since September last year is troubling bankers. Banks are apprehensive of committing more investments as they fear more losses if yields further harden from here.

According to ratings agency ICRA, the yield on the old 10-year government of India security (6.79 per cent GS 2027) had increased by 123 basis points (bps) to 7.72 per cent on February 14, 2018, from 6.48 per cent on September 1, 2017. Moreover, the yield on the new 10-year benchmark G-Sec (7.17 per cent GS 2028) rose from 7.17 per cent, when it was first issued in January 2018, to 7.60 per cent on February 1, 2018, before easing somewhat to 7.49 per cent as on February 14, 2018. “There is clearly a demand-supply mismatch,” says Srivastava. “If government front loads its expenditure, it will also front-load its borrowing. We should not forget that it’s a pre-election year. Banks need to come back (to the market). At the policy level, a lot of engagement will be needed,” he says.