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Commentary

Gilt yields go down, gilt fund prices jump

Reuters: Indian bond yields at 3-yr lows on rate cut hopes

Indian federal bond yields dived to three-year lows on Wednesday after China’s rate cuts spurred expectations the central bank would soon follow suit, encouraged by forecasts of a further dip in inflation.

G-Sec yields had gone up on Monday and Tuesday – I have bought a gilt fund (Prudential ICICI Gilt fund, Investment Plan) which has gone up nearly 3% in the last week alone. It was up 0.7% today.

I wonder if I can buy G-Sec’s directly – I saw a paper ad today by ICICI about how you can buy GOI bonds, but these are not tradeable and you won’t benefit by falling yields. Typically a 1% drop in interest rates increases prices by 1-2% (dropping yields by that much) But if you can’t sell your bonds (i.e. if your bonds are “not tradeable in secondary market”) then you don’t get any advantage.

The ICICI web site says GOI 2003, and I assume that’s a WTF.

I’m not quite sure but right now I think corporate bonds will be a good buy if the secondary market has trades. I don’t know why we don’t promote that market – bonds are a fantastic set for trading, and today bond trades can dramatically change the marketplace especially if we allow derivatives on them (bond futures, interest rate futures and options etc.)

The establishment is not in favour, obviously, because this is their turf. Neither is the government – why else would these bonds be non-tradeable, and non transferable? But these are lame excuses. Still, I don’t know how to answer the very basic question: if less than 3% of Indian savings are in stocks, why will anyone bother with bonds?

We can’t force people to invest; we can only make it attractive. Today there is so much “value”, and we have no long term capital gains taxes, we have much lower transaction costs than, say, 1998, and yet, very little new money is coming in. (Although, says SEBI chief Bhave, we’ve seen retail pouring in over 5000 cr. in the last few months. Wow)

Bond funds then, will have to do. Most of them are not honest. The Gilt funds invest in fixed deposits, the bond funds do shady deals and mask them with illegible names and all sorts of weird things are happening out there – please keep yourself informed of fund portfolios before you invest.

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