Summary of this article
Bond yields have risen due to Iran war
War added to pressures of higher supply for bond market
Indian bond markets have rattled along with other global markets amid the ongoing Iran war. As the war approaches the one-month mark, investors have been forced to reassess the impact of a prolonged war on the global economy.
Sharply rising crude oil prices, resulting in further fall of the rupee with the added fears of higher interest rates globally, led to investors choosing safer bets and exiting from emerging market bonds. The 10-year benchmark government bond yield rose to the highest level in more than a month as investors across markets turned risk-averse after the US Federal Reserve maintained a status quo on interest rates, leading to fears that an extended war in West Asia could deter global central banks from cutting rates in the near term or prompt them to raise rates if inflation pressures accelerate.
The war on Iran by the US and Israel began on February 28 and has shown no signs of de-escalation. As a result, around 15 to 20 per cent of the world’s energy supply has taken a hit with the Strait of Hormuz closed.
Along with FPIs, Indian investors have also turned risk-averse, and rising fears of India’s import bill surging due to crude oil prices have limited their buys in bonds. Additionally, India’s government bond supply will also rise in the upcoming financial year, and fears of rising government debt also dampened investor sentiment.
With the rupee falling to new lows, rupee liquidity in the banking economy has also been thinned down as the Reserve Bank of India (RBI) continues to intervene in the foreign exchange market to limit currency volatility. This, in turn, has inevitably led to borrowing rates rising in the market, which has also limited investments by domestic institutional investors in bonds.
What Should Investors Do?
Typically, at a time of geopolitical tensions, such as war, investors tend to invest in safer assets. Fixed income, such as government-backed securities (G-secs). Investors, while investing in bonds, should also ideally opt for debt funds which offer high-quality bonds in their portfolios or funds which offer a combination of fixed and other safer assets with limited volatility in their asset values.
“Would suggest retail investors to invest through debt funds so that they can take exposure in high-quality bonds… A laddered investment approach is advisable to mitigate interest rate volatility and ensure capital preservation in a fluctuating market. Investors should also focus on maintaining sufficient liquidity to capitalise on potential shifts in the interest rate environment,” Abhishek Kumar, a Securities and Exchange Board of India (Sebi)- registered investment advisor (RIA), said.
Experts said that the near-term risks in the market were higher than the longer-term risks. However, in bonds , longer tenure bonds tend to show more capital loss compared to shorter tenure bonds. Kumar suggested investing in top-rated bonds maturing in one to five years to limit losses.
“Positioning at the shorter end of the curve allows for steady accrual income while protecting against potential further rises in long-term yields,” he explained.
