Debt funds: Why the recent yield-curve inversion brings an opportunity for investors

 

Short-maturity debt mutual funds present an attractive opportunity in the near term as the yield to maturity of short-term funds are among the highest in debt fund categories.

With the Reserve Bank of India Governor Shaktikanta Das announcing the monetary policy on April 6, and with interest rates being paused for the time being, let’s shift the attention back to debt funds and how investors should plan their savings. But first, a bit of flashback.

The government securities (G-secs) market witnessed a rare phenomenon a few weeks back.

At the March 8 auctions, banks demanded more on the 364-day Treasury bills (T-bills) than the last-traded yield for the benchmark 10-year G-Sec. The cut-off eventually came in at 7.48 percent for the T-bills, compared with 7.45 percent for the benchmark paper.

Typically, short-term debt securities fetch lower yields than long-term ones. Thus, what happened on that day was quite the contrary. Ergo, ‘inversion’.

Now, that sounds like jargon. This also presents an opportunity for retail investors. Though the curve has tilted towards normalisation since then, short-term yields remain attractive.

Traditionally, an inverted yield curve is seen as a harbinger of slowdown and recession as they indicate investors expect growth to dip in the medium term. Thus, long-term securities such as the 10-year benchmark G-sec lose their lure

The latest inversion in the yield curve was caused by uncertainties over further rate hikes by central banks amid upheavals of all sorts, and further tightening of domestic financial conditions.

The ‘March effect’ of advance tax outflows, along with redemptions in long-term/ targeted long-term repo operations had an impact, too.