Friends, I had assumed as long as there is no Interest Rate movement announced by RBI there should be stability in GOI Bond/GILT prices, at least no drastic falls… But last few days there has been a big fall leading to negative returns in MF holding these GOI bonds…
Can any expert shed light on what lead to this fall?
Inflation seems to be the biggest culprit. This is driving up the yields on the log end. They announced an OMO (buyback of bonds) to push the yields down but that may not be enough. Plus in the last policy announcement there was not rate cut. If you are holding Gilt funds, you are in for a period of negative returns in all probabilities.
Thanks Rahul… I am a newbie so trying to understand this in layman terms…
So the open market buyback lead to GOI bond price falls as there was excess supply (or less demand?) and hence my GILT MFs NAV fell due to Capital Loss? And RBI planned this to bring down bond yields to counter high inflation?
Yields rose over infaltion worries, growth worries etc. RBI tried to bring down the yields by doing an OMO but it was too small apparently.
Gilts do well in a falling rate environment and it seems like the rate cut cycle is done. And in a rising rate environment - assuming that we are heading into one, long gilts will be quite volaitile and will yield negative returns.
All theoretical of course, nobody knows what’s going to happen. These are risks of holding gilts.
Every one expects their return on investment to be more than inflation.
No one is keen to purchase bonds as the yield on investing in bonds tends to be less than inflation.
This results in decrease of the demand and there by the prices.
The decrease in prices will lead to increase in the yield.
When the increased yield beats inflation, only then the demand increases and thereby the bond prices.