New Delhi [India], November 10 (ANI): Rising bond yields have made fixed-income investments attractive, but investors should remain cautious as yields could move up further in the coming months amid tighter monetary policy and changing liquidity conditions, according to a report by SBI Funds Management.
The report said market yields have increased over the previous month following the initiation of monetary policy hikes and measures to reduce surplus liquidity in the banking system.
While current returns are attractive, SBI Funds believes investors should avoid making large bets on long-term bonds until there is greater clarity on interest rates and market conditions.
"While absolute yields remain attractive," the report said, adding that the uncertain global environment and relatively low domestic inflation signals warrant a cautious approach towards long-duration investments.
The fund house also said that further changes in bond yields are possible in the near term. "At the same time, one should appreciate that additional repricing in near term is quite likely," it noted.
Liquidity conditions have also changed, with the reduction in surplus funds through foreign exchange interventions and other measures reducing the need for further open market operation (OMO) sales by the Reserve Bank of India.
However, currency market movements and the impact of monetary policy tightening could lead to tighter liquidity conditions going forward.
The report said weak domestic demand for fixed-income assets could also make it difficult for the market to absorb the supply of both government and non-government securities.
Against this backdrop, the report suggested that investors with core fixed-income allocations could gradually consider short- to medium-term products with maturities of 1-3 years over the coming months.
It said products offering predictable returns over a period that matches an investor's investment horizon could provide greater value in the current environment.
"Products in this category that offer a predictable yield profile should be part of core allocation currently," the report said, referring to fixed maturity and target maturity funds.
The report also said investors should wait for the market to absorb the supply of bonds and for greater clarity on the current monetary tightening cycle before reassessing investments in long-duration products.
The report highlighted global uncertainty, particularly the unresolved Iran conflict, as another factor that could influence bond yields and inflation.
Although the recent decline in crude oil prices has improved sentiment towards Indian assets, SBI Funds said the absence of a permanent resolution to the conflict keeps the risk of a reversal in yields alive.
It added that a sustained moderation in crude oil prices would be important to ease inflation concerns. (ANI)
Rising bond yields make fixed-income investments attractive: SBI Funds
