Corporate Bond Funds – How Attractive the Opportunity Is?

Published on – 29-March-2020

The Covid-19 pandemic has made a wide spread disruption in all segments of financial markets. In past few weeks there has been a huge amount of FII selling seen in debt markets along with equities. RBI could intervene in Forex and GSec segments of the markets but not in Corporate Debt segment. Many investment grade corporate bond prices plunged in last week only to recover and post smart gains after the RBI Policy announcement in which RBI has taken steps to indirectly intervene in the corporate debt market by instructing banks to buy corporate bonds from primary and secondary market from the money received under Targeted Term Lending Operations (LTRO). While given the plunging economy activity, subdue food prices and rock bottom oil prices resulting in benign inflationary environment, we expect further policy rate cuts in next few months. 

In the above context, we have analyzed the opportunity in debt funds as under –

  1. We feel the spread disruption in corporate bond market is settled down up to a large extent by the RBI action on Friday.
  2. There may be further reduction in corporate bond yields in line with the further policy rate cuts.
  3. For a medium-term perspective, we like corporate bond funds only with 100% PSU bond portfolios, as in such unprecedented times, the minute default probabilities of top investment grades also become material.
  4. For short to medium term, we are quite positive on GSec segment as we expect further rate cuts and flattening and even inversion of the curve amid the subdue economic activity.    

Clovek Research