Debt Outlook 2022 - interest rates and debt strategy going forward By Trust Mutual Fund
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* Debt markets have been volatile in the past few months on the backdrop of consistently rising inflation across the world.
* US Federal Reserve recently acknowledged that the inflation was no longer transitory and that growth is broadly normalising. The Fed has started tapering i.e. reducing the amount of monthly quantitative easing and it is estimated that will conduct at least 3 rate hikes, starting March 2022 Globally most central banks are reversing the extra ordinary monetary policy actions in a bid to return to normalcy.
* While RBI has kept rates unchanged to support growth impulses, we envisage a series of gradual rate hikes, over the next year. Morgan Stanley believes the effective overnight rates will go up by as much as 150 bps in 2022.
* Bond markets have begun the process of repricing and the 3 year G-Sec has moved up by 55 bps, while 10 year moved by just 20 bps in the past 3 months. It is going to be a tough period for investors and as the near term returns will be low in the next 2-3 schemes across debt schemes.
* In a rising rate environment, investors are advised to take exposure to shorter duration portfolios to avoid any large mark to market impacts. The accrual on 2-3 year segment and the steepness in the curve offer good buffer against rise in yields if investment horizon is for 6-12 months. Alternatively, portfolios having a roll down strategy of ~ 3 years will be ideal given they function like open ended FMPs. Given the volatile environment, we continue to believe that it would be ideal to avoid long duration exposure and invest in roll down or short duration.
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