In an insightful dialog, Gautam Kaul, Senior Fund Supervisor – Fastened Revenue at Bandhan AMC, breaks down how period performs a vital position in enhancing returns throughout a falling fee surroundings.
From the mechanics of value sensitivity to technique shifts for numerous investor profiles, Kaul provides a transparent roadmap for navigating bond markets in a altering fee cycle. Edited Excerpts –
Kshitij Anand: For buyers, particularly retail ones, may you give them a small masterclass on how fee cuts have an effect on investor demand for various tenures of company bonds? I’m positive loads of new buyers—or the Gen Z ones, you might say—may not relate a lot to how bonds work. There’s usually extra concern than correct information. So, in case you may simplify this equation for them, that may be actually nice.
Gautam Kaul: While you’re investing in any fastened revenue instrument, there are two broad dangers that you’re uncovered to—period and score. Ranking refers back to the credit score danger related to the bond. Period refers back to the weighted common maturity of all of the bond’s money flows.
To simplify, the sensitivity of a bond’s value to rate of interest motion is measured by its period. For instance, if a bond has a period of 1, then for a 1% change in yields, the value of the bond will rise or fall by 1%.
Equally, if the bond has a period of 10, a 1% change in rates of interest would trigger a ten% change within the bond value—plus or minus. There’s a little bit of nuance to this, however that’s the essential precept.Why is that this vital? As a result of when rates of interest rise or fall, the mark-to-market (MTM) influence in your portfolio is ruled by the bond’s period. Bond returns come from two elements: the coupon (or carry) and the MTM influence. Until you might be holding a bond until maturity, your holding interval return consists of the coupon you earn—sometimes the majority of the return and accrued every day—and any MTM achieve or loss.So, taking our earlier instance: in case your bond has a period of 1 and rates of interest drop by 1%, you’ll achieve 1% from the MTM, along with your common coupon. For those who promote at that time, that MTM achieve is realized.
Once we discuss to buyers about fastened revenue, we encourage them to take a look at two dangers: period danger, which drives the volatility of a bond fund, and credit score danger. These are the important thing parameters you need to consider earlier than selecting which funds to spend money on.
SEBI has helped right here by way of its categorization framework. For instance, liquid funds can’t spend money on devices with maturities past 90 days; low-duration funds are capped at one 12 months; short-term funds have outlined period bands. So, buyers get a transparent thought of the utmost and minimal period danger a fund might carry.
For instance, short-term funds should keep a Macaulay period between one and three. So, in that case, for a 1% change in rates of interest, your MTM influence may vary from 1% to three%.
Earlier, it was comparatively simple to evaluate the period danger of a portfolio however a lot tougher to evaluate credit score danger. You needed to dig into truth sheets and manually test the scores of each holding. However just a few years in the past, SEBI launched the Potential Threat Class (PRC) matrix—a easy but highly effective device.
It requires each fastened revenue fund to outline the utmost stage of period danger and credit score danger it could take.
For instance, if a fund declares itself as PRC “A” on credit score danger, which means the fund’s common portfolio score will probably be at the very least AAA always. If it’s PRC “B,” then the common score should be at the very least AA.
This provides the investor a transparent sense of the utmost credit score and period dangers related to the fund—two of probably the most vital parameters when investing in fastened revenue.
So, in case you do nothing else, simply take a look at the PRC classification. It offers you a dependable, forward-looking measure of the fund’s danger profile.
Kshitij Anand: Other than that, wanting on the trade extra broadly—do you see the Indian bond market rising as a comparatively secure haven amid the worldwide debt uncertainty?
Gautam Kaul: Oh sure, completely. In actual fact, I’d say India is, if not distinctive, actually one of many few economies that provides each macroeconomic stability and excessive yields.
To present some context—long-term fastened revenue buyers are primarily attempting to protect the buying energy of their cash. Which means incomes returns that beat inflation, which is the holy grail. Attaining that constantly requires macro stability: low fiscal deficit, low and secure inflation, and ideally a manageable present account deficit.
India ticks all these containers. Our present account deficit is low and secure. We’re much less uncovered to tariffs in comparison with economies like Southeast Asia or China, which rely closely on manufacturing exports. Our exports are predominantly services-based, that are extra insulated from world tariff points.
Inflation can also be effectively underneath management—decrease than the RBI’s forecast and effectively beneath its higher tolerance stage. The federal government has been fiscally accountable, lowering the fiscal deficit 12 months after 12 months (besides through the COVID interval, the place even then, spending was focused and managed). They’ve additionally dedicated to bringing down the debt-to-GDP ratio over time.
These are precisely the metrics that any world fastened revenue allocator appears at. In consequence, world buyers have already began viewing India as a set revenue haven, even earlier than our inclusion within the JP Morgan bond index.
Simply take into account this instance: For those who examine two nations—one the place the fiscal deficit is rising from 5.5% to six.5-7%, and one other the place it’s falling from 5.5% to 4.5%—you’d assume the latter is a developed market and the previous an rising one. However in India’s case, it’s the alternative. That speaks volumes about our coverage energy.
And all of this hasn’t occurred accidentally—it’s the results of deliberate, disciplined coverage choices. For a worldwide fastened revenue allocator, this alerts a secure surroundings with enticing returns.
One other key level: overseas possession of Indian authorities bonds remains to be fairly low—even submit JP Morgan inclusion, it’s underneath 3%. For comparability, many different rising markets have overseas possession ranging between 5-15%.
So sure, India provides a beautiful macro panorama, a deep and rising market, and loads of headroom for elevated overseas participation. I imagine we’re well-positioned to develop into a most well-liked vacation spot for world fastened revenue allocations.
Kshitij Anand: Additionally, let me get your perspective on ESG — one of many key themes that has emerged in each fairness and bond markets. Are buyers assigning a valuation premium to corporations issuing ESG-compliant bonds, and what’s driving the rising reputation of those devices?
Gautam Kaul: ESG as a motion — and the market connected to it — has gained important traction and momentum within the West. In India, we’re nonetheless at a really early stage of the complete ESG investing platform. Even inside our panorama, fairness is the place we’re seeing extra traction in comparison with fastened revenue.
That stated, we now have seen some personal corporates issuing ESG bonds. In actual fact, the Authorities of India additionally points inexperienced bonds. So, there’s a concerted effort, and naturally, some demand for these devices from particular segments.
From a set revenue perspective, the market remains to be nascent and growing. A lot of the demand for ESG bonds presently comes from overseas buyers quite than home ones.
I imagine that as consciousness grows, we may see ESG-dedicated funds in India as effectively — both from Indian or overseas buyers — which may additional drive funding in ESG bonds. There may be nice potential right here, however we’re nonetheless within the early days.
Is the market paying a major premium for ESG bonds? Selectively, sure. But it surely nonetheless must evolve right into a extra widespread and customary observe.
As an example, the federal government’s borrowing value for inexperienced bonds versus common bonds isn’t very completely different — maybe only a 5-basis level premium.
When inexperienced bonds have been first launched, our sense was that this premium — or “greenium,” because it’s referred to as — could possibly be a lot greater. Which may nonetheless be the case sooner or later, given the early stage of the INR bond market.
(Disclaimer: Suggestions, strategies, views, and opinions given by specialists are their very own. These don’t signify the views of the Financial Occasions)
In an insightful dialog, Gautam Kaul, Senior Fund Supervisor – Fastened Revenue at Bandhan AMC, breaks down how period performs a vital position in enhancing returns throughout a falling fee surroundings.
From the mechanics of value sensitivity to technique shifts for numerous investor profiles, Kaul provides a transparent roadmap for navigating bond markets in a altering fee cycle. Edited Excerpts –
Kshitij Anand: For buyers, particularly retail ones, may you give them a small masterclass on how fee cuts have an effect on investor demand for various tenures of company bonds? I’m positive loads of new buyers—or the Gen Z ones, you might say—may not relate a lot to how bonds work. There’s usually extra concern than correct information. So, in case you may simplify this equation for them, that may be actually nice.
Gautam Kaul: While you’re investing in any fastened revenue instrument, there are two broad dangers that you’re uncovered to—period and score. Ranking refers back to the credit score danger related to the bond. Period refers back to the weighted common maturity of all of the bond’s money flows.
To simplify, the sensitivity of a bond’s value to rate of interest motion is measured by its period. For instance, if a bond has a period of 1, then for a 1% change in yields, the value of the bond will rise or fall by 1%.
Equally, if the bond has a period of 10, a 1% change in rates of interest would trigger a ten% change within the bond value—plus or minus. There’s a little bit of nuance to this, however that’s the essential precept.Why is that this vital? As a result of when rates of interest rise or fall, the mark-to-market (MTM) influence in your portfolio is ruled by the bond’s period. Bond returns come from two elements: the coupon (or carry) and the MTM influence. Until you might be holding a bond until maturity, your holding interval return consists of the coupon you earn—sometimes the majority of the return and accrued every day—and any MTM achieve or loss.So, taking our earlier instance: in case your bond has a period of 1 and rates of interest drop by 1%, you’ll achieve 1% from the MTM, along with your common coupon. For those who promote at that time, that MTM achieve is realized.
Once we discuss to buyers about fastened revenue, we encourage them to take a look at two dangers: period danger, which drives the volatility of a bond fund, and credit score danger. These are the important thing parameters you need to consider earlier than selecting which funds to spend money on.
SEBI has helped right here by way of its categorization framework. For instance, liquid funds can’t spend money on devices with maturities past 90 days; low-duration funds are capped at one 12 months; short-term funds have outlined period bands. So, buyers get a transparent thought of the utmost and minimal period danger a fund might carry.
For instance, short-term funds should keep a Macaulay period between one and three. So, in that case, for a 1% change in rates of interest, your MTM influence may vary from 1% to three%.
Earlier, it was comparatively simple to evaluate the period danger of a portfolio however a lot tougher to evaluate credit score danger. You needed to dig into truth sheets and manually test the scores of each holding. However just a few years in the past, SEBI launched the Potential Threat Class (PRC) matrix—a easy but highly effective device.
It requires each fastened revenue fund to outline the utmost stage of period danger and credit score danger it could take.
For instance, if a fund declares itself as PRC “A” on credit score danger, which means the fund’s common portfolio score will probably be at the very least AAA always. If it’s PRC “B,” then the common score should be at the very least AA.
This provides the investor a transparent sense of the utmost credit score and period dangers related to the fund—two of probably the most vital parameters when investing in fastened revenue.
So, in case you do nothing else, simply take a look at the PRC classification. It offers you a dependable, forward-looking measure of the fund’s danger profile.
Kshitij Anand: Other than that, wanting on the trade extra broadly—do you see the Indian bond market rising as a comparatively secure haven amid the worldwide debt uncertainty?
Gautam Kaul: Oh sure, completely. In actual fact, I’d say India is, if not distinctive, actually one of many few economies that provides each macroeconomic stability and excessive yields.
To present some context—long-term fastened revenue buyers are primarily attempting to protect the buying energy of their cash. Which means incomes returns that beat inflation, which is the holy grail. Attaining that constantly requires macro stability: low fiscal deficit, low and secure inflation, and ideally a manageable present account deficit.
India ticks all these containers. Our present account deficit is low and secure. We’re much less uncovered to tariffs in comparison with economies like Southeast Asia or China, which rely closely on manufacturing exports. Our exports are predominantly services-based, that are extra insulated from world tariff points.
Inflation can also be effectively underneath management—decrease than the RBI’s forecast and effectively beneath its higher tolerance stage. The federal government has been fiscally accountable, lowering the fiscal deficit 12 months after 12 months (besides through the COVID interval, the place even then, spending was focused and managed). They’ve additionally dedicated to bringing down the debt-to-GDP ratio over time.
These are precisely the metrics that any world fastened revenue allocator appears at. In consequence, world buyers have already began viewing India as a set revenue haven, even earlier than our inclusion within the JP Morgan bond index.
Simply take into account this instance: For those who examine two nations—one the place the fiscal deficit is rising from 5.5% to six.5-7%, and one other the place it’s falling from 5.5% to 4.5%—you’d assume the latter is a developed market and the previous an rising one. However in India’s case, it’s the alternative. That speaks volumes about our coverage energy.
And all of this hasn’t occurred accidentally—it’s the results of deliberate, disciplined coverage choices. For a worldwide fastened revenue allocator, this alerts a secure surroundings with enticing returns.
One other key level: overseas possession of Indian authorities bonds remains to be fairly low—even submit JP Morgan inclusion, it’s underneath 3%. For comparability, many different rising markets have overseas possession ranging between 5-15%.
So sure, India provides a beautiful macro panorama, a deep and rising market, and loads of headroom for elevated overseas participation. I imagine we’re well-positioned to develop into a most well-liked vacation spot for world fastened revenue allocations.
Kshitij Anand: Additionally, let me get your perspective on ESG — one of many key themes that has emerged in each fairness and bond markets. Are buyers assigning a valuation premium to corporations issuing ESG-compliant bonds, and what’s driving the rising reputation of those devices?
Gautam Kaul: ESG as a motion — and the market connected to it — has gained important traction and momentum within the West. In India, we’re nonetheless at a really early stage of the complete ESG investing platform. Even inside our panorama, fairness is the place we’re seeing extra traction in comparison with fastened revenue.
That stated, we now have seen some personal corporates issuing ESG bonds. In actual fact, the Authorities of India additionally points inexperienced bonds. So, there’s a concerted effort, and naturally, some demand for these devices from particular segments.
From a set revenue perspective, the market remains to be nascent and growing. A lot of the demand for ESG bonds presently comes from overseas buyers quite than home ones.
I imagine that as consciousness grows, we may see ESG-dedicated funds in India as effectively — both from Indian or overseas buyers — which may additional drive funding in ESG bonds. There may be nice potential right here, however we’re nonetheless within the early days.
Is the market paying a major premium for ESG bonds? Selectively, sure. But it surely nonetheless must evolve right into a extra widespread and customary observe.
As an example, the federal government’s borrowing value for inexperienced bonds versus common bonds isn’t very completely different — maybe only a 5-basis level premium.
When inexperienced bonds have been first launched, our sense was that this premium — or “greenium,” because it’s referred to as — could possibly be a lot greater. Which may nonetheless be the case sooner or later, given the early stage of the INR bond market.
(Disclaimer: Suggestions, strategies, views, and opinions given by specialists are their very own. These don’t signify the views of the Financial Occasions)
