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Fixed Income

Chart: 10 Year Bond Flip-Flops and Ends at 8.25%

The RBI credit policy today may have been a non-event but it certainly seemed to be eventful for bond markets. The 10 year benchmark bond (2013) first saw yields dip, crashing from 8.16% before 11 am to below 8% around 12:30 pm, and then rising rapidly to close at 8.26%.

10 year bond yield

 

To give you an idea of what this means on the price – the bond at the lowest yield was priced at 94.39 and ended at 92.72. These sound like ordinary moves in the equity markets – not even worth a mention – but they can be quite serious in the bond markets which aren’t usually this volatile.

The other bonds are in worse shape. Most debt mutual funds will fall.

Note this carefully: Debt funds have risk. Period. Do NOT think it is a government bond so there is no risk. There is no “default” risk, perhaps. But there is “interest rate” risk – when rates go up (as the above yield rise indicates) the price will fall, and such bond funds will hurt when you mark them to market.

However the impact on ultra short term and liquid funds will be miniscule, simply because – the longer the “duration” of the bond, the greater its price change when interest rates change. Liquid and ultra-short-terms hold securities that mature within the next few months.