REASONS FOR BENCHMARK GOING UP
Kindly refer to my various blog notes on why invest in long term G-Sec schemes. I have spoken about the same since the eve of the July Credit Policy. Also, as was foreseen by most market participants and reiterated by RBI, that containing inflation is going to be a bigger priority than pushing for growth, & hence it was a foregone conclusion that there will further rate hikes in between policy dates and on policy dates as well.
Keeping this in mind I had suggested a strategy of investing in G-Secs every Friday since the date of Policy and continuing investing for the next 3-4 months. This strategy was to
a) Mitigate risk of yield spikes which are imminent
b) Create an average at every rise in yields & c) wait for one correction based on various fundamental & technical reasons mentioned in my various notes & exiting thereafter.
Since the Policy date, 10 year benchmark yields have gone up steadily from 7.70% (on policy date to currently at 8.05% (after touching a high of 8.08% yesterday i.e. yields have gone up almost 30 bps from the policy date & likely go up further on future rate hike dates). As mentioned by me, one can not time the entry at ultimate peak nor time exits at ultimate bottom; strategy of investing on weekly basis will help in creating an average without resorting to timing the markets.
Main reason for the 10 year benchmark yields moving up so sharply over the last few days is that market participants have started offloading this G-Sec ahead of the time when it will become illiquid in a few months time when new benchmark will be announced & to make it worse there is another Rs.15000 Crs of issuance of this bond which is yet to come. Question is who is going to buy this security when everyone is on a selling spree of 2020 paper.
Over the past few months when yield differential between 7.80% 2020 & 8.13% 2022 papers was almost 20-25 bps (i.e. 2022 on yield basis was quoting 20-25 bps higher than 2020- which is how it should be priced) ; is now currently in reverse ratio wherein 2020 is quoting 8.05% v/s 8% yield on 2022 paper. All this is due to more technical factors and demand/supply issues & not connected to fundamentals of the market. Since there is no clarity from RBI on whether they will still support liquidity of 2020 for a few more months, market participants are getting jittery and are in oversold position. In fact most of the MF schemes should be out of this paper & sitting light. They are more invested in 5 year & 12 year G-Sec papers.
This is evident from the analysis I have done of the strategy recommended by me of investing in G-Sec (since July policy) on weekly basis. Most of the schemes till August 24 were marginally positive or marginally negative (inspite of the fact that 10 year benchmark as mentioned above has gone up by more than 30 bps since then to now):
I had selected 4 schemes wherein an investor would have invested Rs.1cr on weekly basis on Fridays. I have also mentioned the 10 year benchmark yields on those dates and the current 10 year benchmark as on August 25’2010:
| S. No. | Date | Total value | Current Date | Period | 10 yr G-Sec |
| 1 | 27-Jul-10 | 1,00,00,000 | 25-Aug-10 | 28 | 7.72 |
| 2 | 30-Jul-10 | 1,00,00,000 | 25-Aug-10 | 25 | 7.80 |
| 3 | 06-Aug-10 | 1,00,00,000 | 25-Aug-10 | 18 | 7.83 |
| 4 | 13-Aug-10 | 1,00,00,000 | 25-Aug-10 | 11 | 7.82 |
| 5 | 20-Aug-10 | 1,00,00,000 | 25-Aug-10 | 4 | 7.98 |
| 5,00,00,000 | 8.07 | 7.83 |
As you can see from above table, average of 10 year benchmark is at 7.83% whereas yield of 10 year benchmark as on August 25’2010 was 8.07%. Following is the outcome of our above investment strategy with 4 G-Sec Schemes with current value of Rs.5 Cr investment (i.e. Rs.1 Cr invested every week since past 5 weeks):
| 1 | DSP BlackRock G-Sec | 5,00,00,000 | 4,98,62,238 | -1,37,762 | -0.27 |
| 2 | ICICI Prudential GFIP | 5,00,00,000 | 5,02,13,010 | 2,13,010 | 0.43 |
| 3 | Kotak Gilt – Investment Regular Plan | 5,00,00,000 | 4,96,65,450 | -3,34,550 | -0.67 |
| 4 | Birla Sun Life G-Sec Fund – LT | 5,00,00,000 | 5,01,27,420 | 1,27,420 | 0.25 |
As can be seen from above, inspite of yield spikes of more than 35 bps and average of our strategy investments yield at 7.83% v/s current benchmark yield at 8.07%; this strategy has posted marginal positive/marginal negative or no returns so far. By creating average going forward at maybe higher yields, with other fundamental factors like lowering commodity prices, lowering inflation, higher revenue and other receipts by the Govt etc affecting the markets positively; the said strategy should pay good returns to the investor. Since traders are light on their positions & not really bearish of the debt markets; any positive cues will help the yields to start easing off.
All I am trying to say here is that no portfolio will have more than 10-20% allocation to long term G-Secs. For that portion adopt the strategy suggested by me. Also, take advantage of higher yields and lock in your portfolio in 6-12 month FMPs (based on your cash flows) as these higher yields will not last for too long. Hence invest in long term FMPs that will be launched from now to say end October which will have the opportunity of capturing higher and higher yields.
Leave a Comment