Sure. Also RBI might not cut rates as aggressively as (if) the Fed does, given that our inflation is not that high and economy seems to be pretty strong presently. Wonder if dynamic bond funds have larger %age of LT holdings (chked couple but didn’t find so) and can better potential in this scenario.
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hi Shail, I did allocate 6% of my portfolio to HDFC long duration couple of months back and now sitting at 4.49% absolute return since last 6 months.
With markets being very high i would like to reallocate 6% more from equity to debt. Do you suggest to choose HDFC long duration? I was reading somewhere that constant duration (or something similar sounding) may be a better choice as they adjust debt duration with the interest cycle.
regards
Constant duration funds don’t adjust duration with interest cycle instead they keep it fixed. This allows the investors to choose what duration they wish to allocate to instead of a fund manager choosing it for them.
If you want fund managers to choose the duration, you can look at dynamic funds instead.
I am still holding onto long duration funds and would only decide to exit once the first rate cut materializes.
Won’t there be multiple rate cuts?
There would be , but the rest would be priced-in once the first one takes place.
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I mean I was checking to redeploy more to debt. Do you suggest long duration or others?
I would not be able to provide you a specific advise, but my entire debt allocation is still in long duration bonds.
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@SHAIL_APTE The 1st rate cut happened last week. I did not see any drop in the yields, nor any appreciation in the long duration funds that I hold. If anything, the last Friday NAV dropped , after the RBI rate cut !! Is it because, the rate cut was as anticipated? if that is the case, this instrument can never deliver since the actual rate cut will never be more than what market expects…at least not in India…any insights?
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The rate cut was widely expected, given the previous RBI governor’s hints, and the new governor delivered on those expectations. However, based on current data, the cut was unnecessary, suggesting that further rate reductions may not be on the horizon. The original thesis assumed that once the first rate cut occurred, future cuts would be priced in. However, with no clear path for additional cuts, markets did not factor them in. Instead, the market reacted negatively, viewing the cut as unwarranted. The prevailing sentiment now is that global volatility is increasing, and easing monetary policy too early could lead to a resurgence of inflation.
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hi, with 50bps cut in repo rate I expected a jump in returns. but my long term bond had a -0.18% return for the day. Is it a time to exit ?
Buy the rumor sell the news event. 5.5% is still high enough imo. I expect it would go lower in the long run as the country races to become top 3 Global GDPs.
Disc: Long on Gilts.
The theory during the last cut was ‘they gave, what was expected’ and hence nothing to crow about. This time, they had given more…so, I guess, the theory this time will be ‘future cuts will take time due to unexpected cut now and hence, kill the long term bond’ 
A lot of things are at play here:
- Market had already discounted rate cuts.
- RBI mentioned that they front loaded the interest cut that means no near term triggers.
- Sovereign long term rates of India and US are getting too close. 4.5% and 6.2%. Now FIIs may not find that spread attractive enough to buy Indian gilt/bond given foreign country/developing nation risk discount and movement of currency itself.
- Globally long term bonds interest rate have got pushed up by market, be it US or Japan (not sure of Europe). Market is not responding to central banks signals. Market feels that real inflation will be higher in long term given geo-politics and supply chain issues. Market is forward looking and not extrapolating central banks few Q projections.
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What kind of supply chain issues are we talking about here that could potentially impact India? US inflation will likely be higher because of Trump’s antics and they will be impacted. Crude prices are lying low. Good monsoon should help manage food price inflation.
We are talking about long term bonds. Market is trying to discount future not next Qs.
Rare earth material shortage is issue we are facing right now. Brent crude has fluctuated from 40 to 115 in last 5 years. So long term outlook can not be based on current price. In new Geo-political environment it is not cheapest but most resilient supply is what world is working towards, means higher costs for everything.
25bps cut was already priced-in. The additional 25bps did not get priced in. Markets are skeptical whether it was the right decision. I think further upside due to bond price appreciation seems limited.