There is hardly any anchoring for the yield by the Reserve Bank of India (RBI), says Lakshmi Iyer, CIO (Loans) and Head Products, Kotak Mahindra AMC, in an interview to Mint. Edited part.
How close are we to the peak of bond yields?
I don’t know how long the peak is. Right now, a large number of investors do not have much faith to invest in long term funds. RBI has introduced another rate, the Permanent Deposit Facility (SDF). Still, the repo and reverse repo have not been extended. Market prices have risen. There is hardly any anchoring of the yield by RBI for now. And then, there is such a huge supply of government bonds. While yields may be stable, we are at around 7.20% on 10-year Government of India bonds.
Are the yields too close to where they should be?
I don’t know where they should be. It’s like throwing darts into the dark without knowing what kind of demand it is. So, it’s going to take some time for yields to stabilize. A significant push will be needed to get people back to the long end of the yield curve.
Will Target Maturity Funds remain attractive over a period of 5-7 years?
I think the theme of carry portfolio yield to maturity earnings for fixed income for 2022 will continue despite all the turmoil. However, the yield curve, which was sharp, has actually started to flatten.
What is Environment on Credit?
On this, we’re okay because incrementally, the corporate balance sheet, which was cash tight, has seen volumes pick up, and businesses are throwing off free cash flow. Significantly leveraged businesses have reduced debt. You have also seen that incremental debt is not adding up as there is hardly any capital expenditure. And over the past two years, credit spreads have come down drastically since the Franklin Templeton scenario.
The fear factor has given a lot of comfort. And of course, the post-Covid era has also given rest. So, I think the spreads are indicating that they are here to stay for some time. That said, we are still not seeing a tremendous jump in bank credit.
Any comprehensive strategy in fixed income?
There has already been so much carnage on the yield curve. Therefore, for a 12-month horizon, you can go for strategies with a duration of more than 15 – 18 months.
Similarly, for a three-year horizon, you can go for three-and-a-half to four years. Second, reduce your risk with strategies like Target Maturity Funds. You know, what are you doing, because there is a proper index, and the interest rate risk is substantially reduced, however, there will be volatility. Carrie sure looks alluring.