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Fixed Income

Gilt Fund – Getting out half – yield at 7.18%

I’ve been holding on to the gilt fund for a while and I’m sick of it – the yields are going up and prices are falling. At 7.18% it’s the lowest I’ve seen for a while, and I am getting out of half my position. Why am I leaving half in there? Just a feeling there’s going to be a better time in the next week.

I’ve made a miserable 4% gain in about 9 months – nothing to write home about. Luckily I won’t pay any taxes on it – all of the money has come in as dividend.

Last week, the auction of 12,000 cr. devolved on primary dealers – meaning, not all of it was subscribed. 285 cr. of a 7 year bond and 630 cr. of a 11 year bond didn’t get subscribed. A lot of bond sales have happened by the RBI lately, like most other governments, and the spirit is to sell even more while the going is good. Well, the going doesn’t seem to be as good anymore.

What will be interesting is the impact of a bad monsoon on yields – with even lower revenues from the after effects of a bad monsoon, the deficit balloons further. At some point we will need to monetize it – meaning, the RBI will buy bonds directly (or, like in the US, slightly indirectly). Monetization breeds inflation – a fear that is currently not on the radar.

Still, this is all the expected result – nearly everyone in the market thinks of the deficit monetization as a conclusion. Yet, I’ve seen markets behave in really odd ways – will there be something different this time? Time will tell.

But I’m getting out when I still have a profit; hopefully it won’t make me regret it by turning around right now!

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