Market Insight – Indian Fixed Income Markets: Offer Great Buying Opportunity

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Yield on the new 10 Year Benchmark bond (Indian Govt.) has climbed to 7.8%.

My take is that at these levels, from the risk reward perspective, longer duration Fixed Income securities in India offer exceptional buying opportunity.

This is because 10 Year G Sec offers risk free Real Interest rate in excess of 3.5%, as inflation is expected to range from 4.0% to 4.5% in the medium to long term.

It is very rare to see such high Risk Free Real Returns. An extraordinary value proposition indeed!!!

While, there is a host of reasons along-with technical factors that have put extreme upward pressure on the Yield, it has been further driven up because of trend following / momentum investing style that most investors follow:

  • Higher inflation numbers in recent months due to higher Food & Fuel inflation numbers but mostly due to unfavorable base effect
  • Synchronized global recovery has led to sharp increases in yield in the developed world
  • Expected acceleration in our own economy means interest rate cycle may reverse here onwards
  • Public Sector banks are on a buying strike, since RBI started insisting on booking losses on their trading portfolio in excess of SLR.
  • Growing concern regarding the increased Budget deficits both at the center & state level
  • GST revenue collection being lower than expected in recent months further accentuating deficit concerns

It is surprising to find that even at these levels, not even one fund house is recommending investing into such securities. While I am fully aware of the hazards of calling a trend reversal, I am sticking my neck out with a strong buy recommendation in the longer duration Fixed Income securities.

Lower than expected CPI number for the month of February due to recent drop in crude oil price and a not so unfavorable base effect in the coming months, may be the trigger for the topping out process of bond Yields in India.

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