Bonds beat FD return in rising rates regime

Updated: Jul 11, 2022, 07:42 IST

According to financial advisers, banks, flush with funds, are reluctant to hike FD rates while bond yields being market driven are giving much higher returns in a rising interest rate scenario. For example, bond market players pointed out that tax-free bonds with about seven-year residual maturity are giving tax-adjusted yield of about 8% compared to about 6.5% that senior citizens could get from FDs in large banks. This is a very different scenario than earlier when bank FDs used to give higher returns than bonds.

At a time when 

inflation

 is hurting people at every level, a slightly higher return on fixed income 

assets

 could cushion people who depend on such incomes from higher expenses due to rising inflation, financial advisers said.

To combat the rising inflation, the 

RBI

 has hiked interest rates in the current cycle. This has resulted in banks increasing their lending rates. However, the increase in FD rates has not happened in the same proportion,” said 

Dilip Kumar Dey

, founder, Lakshmi Finance Traders, a Kolkata-based investment advisory outlet. “Given how the situation has unfolded, corporate bonds and G-Secs are looking to be better and safer options as compared to FD for individual investors.”

Even government securities (G-Secs), that offer complete safety, are offering good returns.

In a market where inflation is at a six-month average of about 6.6% and the benchmark 10-year G-Secs recently hit a high of 7.62%, the market is in favour of investors looking for high returns with high security, said Ankit Gupta, founder, BondsIndia.com, a tech-driven platform that deals in most fixed income securities. “Retired citizens require the highest level of safety with good returns which is delivered by the G-Secs carrying a sovereign rating and faring higher than the inflation rate.”

Gupta feels that “retired citizens can take advantage of the high-inflation-high-return dynamics where they can earn not only high return, but also the way the RBI is trying to control inflation with their macroeconomic policies, the investors will be able to earn a good return in mark to market basis (increase in price) as well in a few years of investment.”

Since yields and prices of bonds have an inverse relationship, so once prices of bonds rise, yields will fall and bond investors can have a higher value of their bond holding.

G-Secs also offer high liquidity and RBI, through its Retail Direct platform, is trying to bring in more retail investors into the G-Sec market. Also, in case of any urgency for cash, “G-Secs have wider acceptance as collateral,” for loans, Gupta said. According to Dey, government bonds being risk-free investments, they ensure proper portfolio diversification benefits in the longer run and are also available for a longer duration.

For example, G-Secs maturing in 2051 and 2061 are available at a yield of about 7.55%. This means investors investing in these bonds will get interest at 7.55% rate for 29 years and 39 years, respectively. No bank would offer FDs of such a long duration. Some highly rated corporate bonds are also offering yields of around 9.5% but for much shorter duration, market data showed.