Fed to be in long pause mode; OBPPs offer wide choice of fixed-income investments
What are your views on the recent surge in the US bond yields? Could it influence the US Fed’s move on interest rates?
The recent surge in US yields was market acceptance of the fact that inflation is here to stay and interest rates will remain higher for longer.
So even though CPI numbers in the US saw highs of 9.1 per cent in June 2022 and the recent reading at 3.2 per cent, the US Fed kept increasing rates until the last meeting in October 2023.
The surge in yields has been in the long end as rate hikes did not result in an economic slowdown or spike in unemployment rates, implying that the US economy may indeed see a soft landing.
However, I do not see any imminent rate cuts in the US as inflation remains higher than the Fed-mandated target of 2 per cent with economic growth intact.
Hence, my view is that the Fed will be in a “long pause” mode now and the long-end interest rates will be in a 4.50-5 per cent range.
What is the current landscape of the Indian government securities market?The total outstanding government securities market stood at ₹161.1 lakh crore (source: RBI) which is an increase of 7.1 per cent in FY24 from ₹150.4 lakh crore as of March 31, 2023.
The composition of the outstanding government bonds is as below:
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The view on government securities is that yields will remain range bound and RBI is likely close to the end of the rate hike cycle.
We think that the short-end segment for up to three years offers good value to retail investors as interest rates moved most in this segment and are up by about 3 per cent from Covid lows in 2020.
What are the emerging investment opportunities for retail investors in the Indian debt market?
With the advent of regulated Online Bond Platform Providers (OBPPs), investors now have a wide choice of fixed-income investments.
We are seeing this shift away from classic FD investments to bond investments.
I think we still have a long way to go in educating retail about debt investments.
Hence, we continue to focus on the entire credit spectrum from government bonds to single A-rated and listed bonds of companies.
Sticking to listed straight bonds offers the best understanding and return in my opinion.
So there are many options from government securities offering 7+ per cent right up to single-A corporates giving close to 12 per cent returns.
I think that investors should stay away from unregulated debt instruments because they would have no recourse to regulators or appropriate enforcement methods at their disposal if things were to go wrong.
Also, structured credit or low-rated bonds in the BBB category may not compensate investors for the high risks they may carry and should be avoided when you start your fixed-income investment journey.
Also Read: US government bonds yield cross 5%, a decadal high: Should you invest?
How online bond platforms are playing a crucial role in the deepening of the fixed-income industry?
SEBI-registered Online Bond Platform Providers (OBPPs) are playing a pivotal role in deepening the fixed-income industry by helping to bring retail capital into bond investments in a defined regulatory framework.
Historically bond investment has been an institutional or HNI play only and has lacked transparency or liquidity.
OBPP’s continued impact can be defined in three main points:
(a) Information/education – Platforms provide a lot more self-learning tools like educational blogs/videos plus conduct webinars for investor education. They also provide all information on a bond including rating rationales and information memorandums. This is helping transform a lot more retail investors towards bonds.
(b) Tech-enabled access – On platforms like ours at IndiaBonds, an investor can log in, do paperless KYC and make payment for investing in a bond – all in five to seven minutes. Platforms have used technology to create easy access for bond investments today. Also, tech-enabled tools like Bond Directory and Bond Calculator arm investors with correct tools for making informative investment decisions.
(c) Offering Choice – Traditionally retail investors have known only FDs as a fixed-income investment option. This comes with disadvantages due to its shorter tenor, illiquidity and penal lock-ins.
Now investors can choose from different fixed-income options online to suit their risk appetite and investment horizon.
For example, at IndiaBonds we have over 100 bonds on offer at any time from government securities to single A-rated corporate bonds that provide investment options from 7-12 per cent.
One must remember that all bond platforms are not the same and investors should ensure that platforms offering fixed-income products are SEBI registered stockbroker and licensed OBPP.
This would provide them with regulatory assistance in case things go wrong.
How is the maturity of the fixed-income industry in India compared to other markets?
India’s public bond markets stand close to $ 2.5 trillion now which is of considerable size.
Although people compare the fixed-income industry to peer emerging markets, we are closer to, if not better than, some of the developed bond markets globally.
In the institutional space, we have defined government issuance calendars, reporting and settlement mechanisms, corporate bond issuance framework and even advanced mechanisms like the EBP (Electronic Bidding Platform) for institutional issuance of bonds.
However, development is needed in spreading more education and awareness amongst individual investors at large.
All portfolios need balance and asset allocation towards fixed income.
Unfortunately, 95 per cent+ of financial investors still do not have any fixed income in their portfolios.
They only think of FDs as fixed-income products or in some cases get lured by structured credit products which may carry very high risk.
Much of this is changing now with the introduction of the OBPP framework by SEBI and continuous joint efforts by platforms to spread the bond knowledge.
Help us understand the key differences between bonds and P2P (peer-to-peer) lending. Why is P2P lending not a fixed-income asset class?
The fundamental distinction between bonds and P2P lending lies in the underlying assets and the associated risk:
(a) Bonds, with a history spanning centuries, are backed by collateral, which means they are secured. In contrast, P2P lending operates in a digital landscape where retail investors directly extend loans to individuals or small enterprises which are unsecured.
(b) Bonds can be traded in the markets and offer liquidity when required. P2P lending lacks the liquidity of a trading market, raising concern about recovery in an economic slowdown or shock.
(c) P2P issuance is for shorter tenors only but in bonds, you can plan your investment as per your maturity needs and also choose from a wide range of issuers.
(d) Even though P2P lending usually is about lending small amounts to a vast number of people. The entire pool may be a risky part of a much larger lending base. Individuals have no expertise in determining pool quality.
(e) Bonds in India are a $ 2.5 trillion market and best bullish estimates would put P2P at a $750-850mm industry.
Experiences in China have shown rapid growth of P2P and subsequent demise and loss of substantial capital as China has been hit with an economic slowdown.
P2P is untried and untested in economic cycles in India and perhaps just the flavour of the times.
It is not a fixed-income asset class but more a lending product, something which traditionally has been done by banks and now by pure lending tech platforms.
Hence, this is not for individuals who may not be able to understand or model underlying risks.
Disclaimer: We advise investors to check with certified experts before making any investment decisions.
