Duration debt funds bore the brunt of steep rise in yields and liquidity tightening measures initiated by the central bank on Tuesday. Overall, the returns of debt funds are estimated to have seen a dip of anywhere between 2% and 5.5%.
Duration products, including income funds and gilt funds, may have seen their returns come off by as much as 4% owing to the rise in yields, according to experts. ?Debt funds have suffered a loss of anywhere between 2% and 5.5%. The higher the duration, the more was the loss,? said Dwijendra Srivastava, head, fixed income, Sundaram MF. The returns on liquid funds and short-term bond funds were also impacted, albeit not as severely as duration funds.
According to Srivastava, losses in debt funds on Tuesday also varied according to the fund composition. ?Schemes that have taken a higher exposure in corporate bonds suffered a higher loss as the yields of corporate bond yields rose more sharply than G-Sec yields.? The spread between the 10-year AAA-rated corporate bonds and 10-year government securities widened from about 105 bps to 125 bps on Tuesday because of the liquidity tightening measures taken by the RBI. The spread was as low as 70 bps in the beginning of June, according to experts.
On Tuesday, the yields of 10-year government securities rose by 53 bps, or 7%, to 8.098% from 7.560% on Monday.
The sharp rise in yields adds to the agony of debt fund investors in duration products. In June, income and gilt medium-&-long-term funds gave average category returns of -0.47% and -0.78%, respectively, on account of the 20-bps rise in yields of 10-year government securities from 7.24% to 7.44%.
The rise in yields last month was driven by the rupee depreciation of more than 5% during the month and offloading of debt holdings by foreign institutional investors (FIIs) of $5.3 billion, the most in a single month in at least 10 years, following the US Fed?s suggestion that it would start to wind down its quantitative easing programme.