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Tag: G-Sec yields

  • Banking sector appears well prepared in the current phase of hardening of yields: RBI Bulletin

    Banking sector appears well prepared in the current phase of hardening of yields: RBI Bulletin

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    The banking sector appears to be well prepared in the current phase of hardening of yields as the timely creation of investment fluctuation reserve (IFR) provides adequate buffers to withstand trading losses, per an article in RBI’s latest monthly bulletin.

    The investment fluctuation reserve (IFR) is created by transferring the gains realised on sale of investments.

    It enables banks to maintain an adequate reserve to protect against increase in yields on their balance sheet in the future.

    In the wake of the guidelines and with falling yields and resultant higher trading profits resulting in higher transfer of funds to IFR, the IFR has reached 2.2 per cent of HFT (held for trading) and AFS (available for sale) portfolio by end-March 2022 at the system level,said RBI officials Radheshyam Verma^ and Rakesh Kumar in the article “Impact of G-Sec Yield Movements on Bank Profitability in India.”

    Also read: Data Focus. Why transmission of repo rate hikes is slower in lending rates?

    Rise in G-sec yields

    However, with sharp rise in G-Sec (Government Security) yields and fall in bond prices in Q1 (April-June) :2022-23, banks recorded treasury losses in their trading book to the tune of 4.9 per cent of their operating profit.

    However, at the system level, SCBs (scheduled commercial banks) managed to maintain their IFR above 2 per cent which reached 2.7 per cent by March 2023.

    As compared to PSBs (public sector banks), PVBs (private sector banks) were more proactive in provisioning towards IFR, the authors said.

    Also read: Bankers’ views on RBI policy

    PVBs crossed 2.0 per cent of their HFT and AFS portfolio in September 2021, while PSBs reached IFR of 2 per cent in March 2022. Despite the hardening of G-Sec yields, PSBs and PVBs were able to manage IFR above 2 per cent.

    “Going forward, strengthening of risk management practices and internal controls by banks remains of paramount importance. Deepening of interest rate derivatives market also assumes significance in mitigating the adverse movements in interest rates on bank portfolios by encouraging the participation of banks for hedging and neutralising large changes in yields,” the RBI officials said.

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  • G-Secs perk up, shrugging off higher June inflation reading

    G-Secs perk up, shrugging off higher June inflation reading

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    The Government Securities (G-Secs) market perked up on Thursday, shrugging off the higher domestic retail inflation print for June even as it tracked the decline in US Treasury yields.

    In the domestic bond market, yield of the 10-year benchmark paper (7.26 per cent 2033 GS) thawed about 4 basis points to close at 7.07 per cent (previous close: 7.11 per cent), with its price rising about 30 paise to close at Rs 101.2775 (Rs 100.9825).

    Bond yields and prices are inversely co-related and move in opposite directions.

    “US inflation reading for June at 3 per cent seems to be moderating towards the Fed’s target rate of 2 per cent.…So, US 10-year Treasury has rallied. Its yield is back to 3.86 per cent level from 4.06 per cent level earlier. Our market mirrored the rally in US Treasuries.

    “Our inflation is not too high. We are still in the comfort zone of 4-6 per cent. At this point of time, our debt market is taking cues from the US market. That is why it rallied along with the US market,” Ajay Manglunia, MD & Head, Investment Grade Group, JM Financial.

    Retail inflation up

    India’s retail inflation print for June came in higher at 4.81 per cent against 4.31 per cent in May 2023 on spike in vegetable prices

    Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP, emphasised that the trigger for the rebound in G-Secs was the rally in US Treasuries, which came on the back of a thaw in US retail inflation.

    “The market was just looking for a positive trigger. Now, that trigger has come in the form of softer retail inflation in the US, which in turn is giving hopes the Fed may not hike rates,” he said.

    Venkatakrishnan expects the 10-year G-Sec to trade in the 7.05 per cent to 7.15 per cent range over the next one week.

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  • G-Sec yields rise on hawkish monetary policy tone

    G-Sec yields rise on hawkish monetary policy tone

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    Yield of the widely traded 7.26 per cent 2032 Government Security (G-Sec) rose about 3 basis points on Wednesday as the monetary policy tone was more hawkish than expected.

    This paper closed at a yield of 7.3435 per cent against previous close of 7.3102 per cent, with its price declining about 23 paise to close at ₹99.43 against previous close of ₹99.655.

    Bond yields and price are inversely co-related and move in opposite directions.

    HDFC Bank, in a report, noted that the monetary policy tone was more hawkish than what most market participants had expected as the RBI recognised that they are still away from achieving their objective of durable disinflation. ·

    “Going forward, the central bank is likely to become more data dependent, and this does not rule out another rate hike in the upcoming policy,” per the report.

    The Bank’s economists expect the 10-year paper to trade between 7.30-7.35 per cent in the near-term.

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    BL Mumbai Bureau

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  • Time to shift from fixed deposits to debt funds; here’s why

    Time to shift from fixed deposits to debt funds; here’s why

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    RBI has been increasing repo rates – the rate at which the central bank lends to banks – and reducing system liquidity over the last five months. The increase in the key benchmark rate, after holding it for a long period since May 2020, has led to bond yields rising across maturities. For example, the benchmark 10-year G-Sec yields have risen almost 160 bps to 7.49 per cent over the last two years. 

    Accordingly, over the last two years, debt funds have not done well as they saw the prices of their holdings going down. This is because when interest rates rise, bond prices fall, and since debt mutual funds need to mark their NAVs to market daily, with the drop in bond prices NAV also suffer. “Debt funds this calendar year have seen investors pulling out almost Rs 2 lakh crore and the returns were mostly positive between 3-4 per cent annualised,” says Sandeep Bagla, CEO, TRUST Mutual Funds.  

    But with the yield-to-maturity of bonds going up, many experts say it is a good time to invest in debt funds. For example, if one has a medium-term horizon (4-6 years), doesn’t mind short-term fluctuations in returns, and is looking at post-tax returns, then a certain class of debt funds, called Target Maturity Funds do score well over fixed deposits. “Target Maturity Funds offer yields (net YTM) in the range of 7-7.25 per cent over the maturity of 4 to 6 years. They predominantly invest in government securities, PSU bonds, and state development loans (SDLs), and the instruments are held till the maturity of the scheme. They are good investment options if one treats them like open-ended Fixed Maturity Plans (FMPs), carrying high-quality bond portfolios and the potential for better post-tax returns. The only caveat is that the investor shouldn’t mind the temporary fluctuations in NAV,” says Alok Aggarwala, Chief Research Officer, Bajaj Capital Ltd.

    “We are recommending investments into funds which have roll down or portfolio maturity of 2 years or lesser. It is quite possible that inflation could remain stubborn and yields may remain higher for a longer period of time. At this point, we would advise only 5-10 per cent to longer-term funds, about 25 per cent to liquid/money market funds, and about 65 per cent to short-term funds or BPSU (Banking and PSU) debt funds with roll-down maturity of lower than 2 years,” says Bagla. 

    Debt funds also score over fixed deposits because of the tax advantage they offer. “When bond rates are rising faster than bank FD rates investing in bond funds should give a portfolio yield higher than fixed deposits. If an investor would hold his/her investment in mutual funds for more than 3 years, the investor would need to pay tax at long-term capital gains tax with indexation benefit. Hence, the post-tax returns for debt mutual funds could be far higher than post-tax returns of bank FDs as there are no tax benefits for holding 3-year deposits,” says Bagla.

    Hence, if one wants to leverage on interest rate movement, it is a good time to invest in debt funds. “For example, in fixed deposits, whereas bank deposits carry a low-interest rate of 5.45-6.10 per cent, certain AAA-rated corporate deposits carry a coupon of around 7 per cent or slightly higher, which, coupled with a lack of interest rate risk, makes them an attractive proposition,” says Aggarwala. Last but not least one needs to pick according to the risk profile, as a higher interest rate comes with higher risks.

    Also read: What is surcharge on income tax? Here’s how you can calculate it

    Also read: Top Sebi official lists out the oft-used modus operandi to commit financial frauds; Check details

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