- Date : 20/03/2023
- Read: 4 mins
Do you know that interest rates are peaking? Do debt markets present a better opportunity now? Read this article to learn more.
Investing in debt markets, also known as fixed-income securities, can be a crucial component of a diversified investment portfolio. Unlike equities, debt markets offer predictable income streams and a lower level of risk. As a result, they can give investors a better risk-adjusted return than other investment options like equities, mutual funds, etc. Additionally, debt instruments can act as a hedge against inflation, and uncertain equity markets, making them an attractive investment for those seeking to preserve their wealth over the long term. This article will explore why debt markets are essential to a well-balanced portfolio and how they can help investors achieve their investment objectives.
Also Read: Wealth of resources for finance professionals
What are Debt Markets? What Are the Advantages of Investing in Debt Markets?
Debt or fixed-income markets are financial markets where debt securities such as bonds, treasury bills, and notes are bought and sold. Governments and corporations issue these securities, and other entities raise funds to finance their operations, projects, or initiatives. Debt securities typically have a fixed interest rate and a specified maturity date and are considered less risky than equities as they provide a steady income stream and lower volatility. In equity markets, there is a possibility of losing principal. In addition, some debt instruments offer indexation benefits which can be helpful in financial planning.
Also Read: More about market commentary and insights
Macro-economic Scenario (Globally and Locally)
After the pandemic (post-March 2021), the stock markets worldwide saw a massive surge in performance. It was primarily due to support from central banks, who injected much liquidity into the system, and governments providing vast amounts of fiscal stimulus.
Timing is essential to make good returns in the market (through debt securities). You should enter when interest rates are at their highest and get out when they're starting to hit bottom. Experts believe that right now, we're close to the top of the interest rate cycle and will begin seeing rates drop in the coming year (CY24). This isn't just happening in India but globally too. Economic growth and inflation rates are going down in several countries. Even equity markets globally and in India appear to be in consolidation mode. Economic growth in India is expected to slow from 6.8% in FY23 to 6.2% in FY24. According to the Reserve Bank of India (RBI), we should see a drop in CPI inflation from 6.7% to 5.3% in FY23 and FY24, respectively.
Most central banks across the globe are finishing up with their tightening of monetary policies. Look at the figures in the US, where the 10-year yield is around 3.75%, while the upper bound for the Fed funds rate is 4.75%. Experts believe a 25 basis point cut later this year, with a more significant 125 basis point cut happening in CY24. In India, RBI is expected to pause and keep the repo rate steady at 6.50%. However, there's a slight chance they could hike it up to 6.75%, which seems unlikely.
Consider debt mutual fund schemes if you are looking for secure investment options. Now is a great time to lock in a reasonable rate and earn capital gains.
Assuming that RBI cuts rates by 100-125 basis points over the next three years, you should see a similar decrease in yield for a 10-year tenor paper. So by investing in these instruments now, you could get an almost risk-free annualised return of around 10% over a three-year holding period.
Also Read: More about various investment options available
When it comes to investments, weighing risks against potential rewards is essential. Currently, equities carry an inherent risk; it's wise to increase your allocation towards debt investments while valuations are favourable. Moreover, interest rates will become more profitable in the next few years. Therefore, reducing debt exposure and shifting towards other asset classes offering better opportunities is prudent.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
Investing in debt markets, also known as fixed-income securities, can be a crucial component of a diversified investment portfolio. Unlike equities, debt markets offer predictable income streams and a lower level of risk. As a result, they can give investors a better risk-adjusted return than other investment options like equities, mutual funds, etc. Additionally, debt instruments can act as a hedge against inflation, and uncertain equity markets, making them an attractive investment for those seeking to preserve their wealth over the long term. This article will explore why debt markets are essential to a well-balanced portfolio and how they can help investors achieve their investment objectives.
Also Read: Wealth of resources for finance professionals
What are Debt Markets? What Are the Advantages of Investing in Debt Markets?
Debt or fixed-income markets are financial markets where debt securities such as bonds, treasury bills, and notes are bought and sold. Governments and corporations issue these securities, and other entities raise funds to finance their operations, projects, or initiatives. Debt securities typically have a fixed interest rate and a specified maturity date and are considered less risky than equities as they provide a steady income stream and lower volatility. In equity markets, there is a possibility of losing principal. In addition, some debt instruments offer indexation benefits which can be helpful in financial planning.
Also Read: More about market commentary and insights
Macro-economic Scenario (Globally and Locally)
After the pandemic (post-March 2021), the stock markets worldwide saw a massive surge in performance. It was primarily due to support from central banks, who injected much liquidity into the system, and governments providing vast amounts of fiscal stimulus.
Timing is essential to make good returns in the market (through debt securities). You should enter when interest rates are at their highest and get out when they're starting to hit bottom. Experts believe that right now, we're close to the top of the interest rate cycle and will begin seeing rates drop in the coming year (CY24). This isn't just happening in India but globally too. Economic growth and inflation rates are going down in several countries. Even equity markets globally and in India appear to be in consolidation mode. Economic growth in India is expected to slow from 6.8% in FY23 to 6.2% in FY24. According to the Reserve Bank of India (RBI), we should see a drop in CPI inflation from 6.7% to 5.3% in FY23 and FY24, respectively.
Most central banks across the globe are finishing up with their tightening of monetary policies. Look at the figures in the US, where the 10-year yield is around 3.75%, while the upper bound for the Fed funds rate is 4.75%. Experts believe a 25 basis point cut later this year, with a more significant 125 basis point cut happening in CY24. In India, RBI is expected to pause and keep the repo rate steady at 6.50%. However, there's a slight chance they could hike it up to 6.75%, which seems unlikely.
Consider debt mutual fund schemes if you are looking for secure investment options. Now is a great time to lock in a reasonable rate and earn capital gains.
Assuming that RBI cuts rates by 100-125 basis points over the next three years, you should see a similar decrease in yield for a 10-year tenor paper. So by investing in these instruments now, you could get an almost risk-free annualised return of around 10% over a three-year holding period.
Also Read: More about various investment options available
When it comes to investments, weighing risks against potential rewards is essential. Currently, equities carry an inherent risk; it's wise to increase your allocation towards debt investments while valuations are favourable. Moreover, interest rates will become more profitable in the next few years. Therefore, reducing debt exposure and shifting towards other asset classes offering better opportunities is prudent.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.
