The US Yield Story explained

1) From the central banks’ perspective, the fight is always about inflation. What happened in the US in the last 2-3 years?

– To help the economy post Covid, US kept interest rates lower for a very long time

– Lower interest rates lead to inflation

– They thought inflation is transitory (temporary) & hence there is no need to increase rates

– Inflation turned out to be sticky & hence US had to increase rates at a fast pace to cope up for the lost ground which troubled the markets.

(2) What’s happening now?

– Rates in the US are at decade highs. These rates were last seen in the 2006 – 08 period

– US 2 years at 5.0981%

– US 10 years at 4.8409%

– Rates are expected to stay higher as the GDP is doing well, Payrolls & unemployment numbers are better, Inflation is high.

– If inflation is sticky, FED wants the rates to be high & if the economy is doing well, FED does not need to reduce rates

(3) What’s happening in India?

– RBI was very prudent in starting to increase rates early

– But in fact its been 4 meetings since the RBI last increased rates / its on a pause

– Our economy is doing well & inflation is under control & hence we have decoupled from US & our bond markets & equity have not reacted as bad as the US

– In last week’s policy RBI said it will do Open Market Operations (OMO)

– OMO is nothing but selling of bonds. RBI thinks banks have a lot of liquidity but they are not lending to NBFC’s & MFI’s & instead parking it with RBI in the overnight market & hence RBI will sell bonds to the banks & take the liquidity from the banks. This led to the fall in India bonds / rise in yields last week.

Fund Wallet’s view > yields in India should not rise further (unless there is something unforeseen that happens) & hence this is a good time to invest in long duration bonds with a 3 to 5 years horizon. Debt funds are still good bet for this time frame (even after the tax change).

High US yields will pave way for capital flight from Emerging Markets to US bonds, FIIs have been net sellers in Indian Equities in the last few weeks. As Israel –  Hamas conflict intensifies, this along with the US yield will add pressure to our Equity Markets. But, remember this is Election year so market would not fall much, if war cascades to nearby regions then we might see some sharp fall of 5 to 10%.

Apart from Pure Debt / Equity schemes there are few popular Readymade Asset Allocation products available for you. Aggressive hybrid equity with approx. 70% in equity and balance in debt, Multi asset funds with at least 10% in gold and debt each and with allocation to Indian, foreign equity and REITS. BAF / Dynamic asset allocation with equity going between 30-80% according to fund framework. Balanced funds with 50% to Debt and 50% to Equities.

Happy Investing!

R♥Vi

Mutual Fund Investments are subject to Market Risk, Please read the scheme documents before Investing. This is not a Recommendation. Fund Wallet is a AMFI Registered Distributor of Mutual Funds.