Is it time to invest into Corporate bonds?

With the Reserve Bank of India’s slashing the repo rate by a further 25 bps in its fourth bi-monthly policy review, investors are dumping liquidity into debt securities. So should you be looking at corporate bond or government bonds?

On a macroeconomic front, oil prices have moved up, the rupee has depreciated, and higher Minimum Support Prices (MSPs) are likely to push up inflation up by end of FY19. However, GDP numbers indicate that the domestic economy is beginning a productive growth phase. Higher accrual and lower volatility make corporate bonds a good investment option in the current environment.

Preference should be for medium-term maturity bonds or invest in high-quality bonds or sovereign papers: This is an opportune time to focus on medium-term AAA/AA corporate bonds or sovereign oriented strategies. Spreads on lower rates assets have actually compressed over the past year as AAA/sovereign rates have adjusted mostly sharply upwards. Thus the value has mostly shifted in favour of high-quality bonds. Also, given rising global financial volatility and tightening financial conditions it is prudent to favour higher-quality versus lower-rated strategies as a means to also build some ‘counter-cyclicality’ in fixed-income.

Yields of high-quality corporate bonds maturing in two to five years tenor have hardened in the last six to nine months due to a number of reasons. Higher inflation, strengthening crude oil prices, prospects of higher government borrowing to fund increasing government expenditures, FPI outflows, demand-supply imbalance in the bond market, etc. have been challenging for the bond market.

While the corporate bond yield curve has more-or-less adjusted to the present macro-economic landscape and has probably factored in some amount of tightening by the RBI. We recommend investors approach investments in high-quality corporate bonds in a staggered manner and spread out the investments over a number of months in order to average out their investments and get invested by the time the yields are closer to their peak.

Happy investing!

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