Is it right time to invest in long duration bond funds?

The 10-year benchmark bond yield has crossed 8 per cent mark recently in the month of September 2018. The reason for such a rise in the yield may be partly attributed to the deteriorating macroeconomic environment. Rising inflation, widening current account gap and higher commodity prices are some of the factors leading to higher yield. It’s not in India, even globally we are witnessing rising yields. US benchmark bond yield has also hit 3 per cent and is trading above that for some time now.

With bond yields continuously rising since July last year, investors and asset allocators are looking at their asset allocation more closely. They may find debt relatively more attractive than equity in risk-adjusted terms. As higher yield also means higher denominator going into value equities and hence if everything remains the same, it signals the lower value of equities making debt even more attractive on a relative basis.

Therefore, as an investor, while doing your portfolio re-balancing should you move some of your funds to long duration debt funds? Is it right time to tactically allocate part of your fund to debt portion?

To know this let’s look at the historical movement of 10-year government bonds and the returns they have generated. However, before that, you need to know that the price of the bonds and yields are inversely related: As the price of a bond goes up, its yield goes down, and vice versa.

Currently, the bond yield is at 8.031 which are higher than the long-term average of 7.768. Therefore, if you want to apportion some amount of your fund to the bond funds with the long duration, you can start now in a staggered manner. Nonetheless, we believe if you want to optimise the returns you can wait for a few more months as interest rates are likely to go up and hence you can enter at a much attractive price later on.