In an environment of high uncertainty, it would be prudent for bond market investors to avoid excessive credit and interest rate risk, Quantum Mutual Fund said in a report.
“We suggest bond fund investors to have a longer holding period to ride through any intermittent turbulence in the market,” the report said
A combination of liquid to money market funds and short-term debt funds or dynamic bond funds with low credit risks should remain as the core fixed income allocation for the investors, it said .
From the bond market’s perspective, this is a perfect storm.
“It was already grappling with rising inflationary pressures, large demand-supply imbalance, and less supportive global monetary policy. Now the geopolitical tensions have added another layer of uncertainty in the market.”
For now, geopolitics remains the biggest driver of the bond market, the report said.
Going ahead, the yield trajectory will be shaped by how long the war goes on, nature and scope of sanctions on Russia, and supply disruptions in the energy and other commodity markets, it added.
On fuel prices, it said: “As state elections get over this week, we may see a steep rise in domestic pump prices, or a major cut in fuel taxes or some combination of both.”
Domestic petrol and diesel prices have not been changed since early November last year apparently due to the state elections.
“We expect a combination of price hikes and a tax cut. This would push inflation higher and reduce the fiscal cushion.”