What All That is GILT is GOLD

Published on – 22-April-2020

In our previous notes, we have mentioned that we are positive on the long duration debt funds primarily holding long dated government securities and PSU Bonds only. Our belief is further strengthened by following developments –

  1. A fear of extended recession after COVID 19 pandemic and central banks around the world are likely to continue accommodative monetary policy i.e. bringing interest rates down. 
  2. Record plummet in crude oil prices to keep inflation benign and provide support to central banks for cutting rates. The WTI Crude crashed to negative on 20th April due a fear of oversupply and lack of storage facility. The Brent is also trading below $30 is expected to remain around this level for a prolonged time period.
  3. Central Banks around the world are likely to print money to provide support to the economies to fight the pandemic led recession.
  4. The fear of default in private issuers will shift money towards safe heaven treasuries and Gilt.

The 10 Year Bond Yield in US has come down by approx 70% since the spread of pandemic, below is a comparison between US 10 Treasury Year Yield and India 10 Years GSec Yield, both scaled to 100 since 1st Jan 2020.

India 10 Year Yield dropped 41% from 9.478% on 15th Jul, 2008 to 5.559% on 15th Jan, 2009. (Scaled to 100 in Graph).

While the US 10 Year Treasury Yields is down 70% from the levels seen on 1st Jan 2020  after beginning the spread of COVID-19, India GSec yields have hardly come down thus not discounting the full-fledged effect of the COVID 19 on the World economy and on India even despite RBI cutting rates by 75 bps in 2020 so far. By the way of RBI reducing 75 bps, short term Treasury Yields are down by approx. 15% since Jan 2020 while long term rates have hardly lost 5% given the spread between the two was already elevated and RBI has been conducting LTRO to bring the same down but without much success so far.

We believe the long-term rates need to come down sooner or later in near term thus bringing down the borrowing cost for Government and a gradual transmission of such to India Inc should take place in medium term.

As history suggests, GILT & GOLD go hand in hand during the times of crisis of such magnitude, we think GOLD will keep it’s rally on even after posting stellar INR returns in last 1 Year while long term treasuries should get benefitted by stimulus packages and a quest for the safe heaven.

Clovek Research

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