Thread by @avasthiniranjan

Long term yields are attractive than short term yields.. how to benefit from this without getting caught wrong footed.. A 🧵

Thanks to a steep yield curve, (situation where long-term yields are higher than short term) many investors today are left confused.

1 year maturing bonds are yielding around 4% to 4.5%, while longer maturity bonds are yielding around 6.5% -7%. The term-spread (1 yr. over 10 yrs. maturity bond yield) of over 2.5% is at decadal high levels.

The dilemma amongst investors is on 2 counts:

Investing in long-term bonds does look attractive as yields are higher, but it also seems risky for many as they expect RBI to reverse policy stance at some point in future. And if yields rise, bond prices may fall.

On the other hand, investing in short term bonds seems safer option amidst expectations of rising yields, but short-term yields are too low to even beat inflation.

One way to play a typical steep yield curve to your benefit is through target maturity or roll-down debt funds. Such funds invest in bonds and hold them till maturity which reduces the interest rate risk (risk from rising bond yields) over a period of time.

It is important to note that since yields on the longer end are already high, they have, to some extent, already priced-in rate reversal. With 10 years bond yields trading 250 bps higher than the 1 year bond yields, there is a good margin of safety in case rate reversal begins

Typically, when term spreads are high, short term bond yields tend to rise faster during rate reversal cycle.

This likely scenario can work in favour of investors who invest in long term bonds (target maturity funds or roll-down funds) and hold them for longer period

By investing in long maturity bonds today they can earn 150 to 200 bps higher yield than short term bonds, and when yields rise, they will rise sharper in the short-term maturity segment than longer term, thus reducing the MTM impact to some extent on the long-term bonds.

The analysis in the table shows that investors are better off investing in 5 to 10 years maturity segment today even if yields were to rise in coming quarters. The holding period returns over 2-5 years is better in long term bonds under stagnant or rising yields scenarios.

Edelweiss MF range of Target Maturity and Rolldown funds Edelweiss MF has a range of target maturity and roll down debt funds with longer maturity that can be considered to take benefit from steep yield curve and earn better returns.
More details here

edelweissmf.com/types-of-mutua…

Full note..