Yield-to-maturity of debt funds now similar across durations, shows data

Mismatch in YTM growth because shorter-end of yield curve more responsive to rate changes, say experts

The yields being offered by debt funds are now similar across categories, with the yield-to-maturity (YTM) of shorter-horizon funds rising at a faster pace than medium-to-longer-horizon funds.

 

In December, the YTM of overnight funds rose by 77 basis points (bps), while medium-to-longer-horizon funds like corporate bond and gilt saw YTMs rise by just 5-10 bps.

 

Experts said the mismatch was because the shorter-end of the yield curve was more responsive to interest rate changes than the medium-to-longer-end of the yield curve.

 

“The yields of short-term debt instruments are directly linked to the repo rate. That’s why they go up with every rate hike. The yields of medium-to-longer-duration are in some way market driven. Since, the market had already factored in future rate hikes some months back, there hasn’t been much movement in yields in the last few months,” said Rahul Jain, senior vice-president of research at International Money Matters.

 

As a result of higher growth in yields of shorter-duration papers, the YTMs of debt funds across categories are now in a small range. Overnight funds, which invest in debt papers of one-day maturity, now have an average YTM of 6.45 per cent. Among medium-to-longer-duration schemes that have low credit risk, medium-duration funds have the highest average YTM at 7.75 per cent. As a result, the difference stood at 130 bps in December compared to 170 in November.

 

Given the similar YTMs, investment advisors see little merit in taking the duration risk by investing in longer-duration funds. “The debt portfolio should be centred around two-three-year maturity. Investors can also look at actively managed funds like dynamic bond funds,” said Lakshmi Iyer, chief executive officer, investment advisory, Kotak investment advisors.
 

 

 

Iyer expects YTMs to remain in a similar range in the near term. “It will remain like this until rate cut expectations go up. That is when the short-end of the yield curve will start to come down,” she said.

 

The credit spread has also come down, resulting in YTMs of credit risk funds remaining stagnant at 8.05 per cent for the last two months. If the fund management fee is taken into account, the yields of credit risk funds are even closer to better-quality funds.

 

Debt mutual funds have seen continued outflows owing to the poor performance over the past year and the rate hike cycle. In December, investors pulled out a net of Rs 22,000 crore from debt funds. Overall, the assets under management of debt funds decreased by Rs 2 trillion to Rs 12.4 trillion in 2022.