The global bond market is enormous. As of 2020, the international bond market’s outstanding value was $123.5 trillion.
Even though India’s bond market has matured in the past few years, it has a long way to go. The participation, especially the retail participation, is less compared to other countries.
As per a Morgan Stanley report, in early 2022, India might be included in the global bond indices and has Rs. 2.25 trillion riding on index inclusion.
This could bring more capital inflows to the Indian bond market, thus increasing liquidity and bringing confidence in the Indian bond market.
Several factors can impact the bond market, such as political and economic instability, supply and demand, and interest rates.
Recently, a few things have been going on in the global economy, such as expectations of an increase in Fed rates and the possibility of Russia Ukraine war.
In this article, let us understand how these factors will affect the bond market and whether you should invest in bonds right now.
Are bonds a safe investment right now?
1. What is the bond investment?
When an investor invests in bonds, they are lending money to a government or company, and in return, they earn interest on their investment. Bonds help in diversifying the portfolio as they are less risky than stocks.
Numerous types of bonds are available, so it’s essential to do your research before investing.
2. How to buy bonds online?
Investors can purchase bonds through an online platform or through a debt broker. If you wish to invest in bonds online, visit www.bondsindia.com
Let us understand some of the latest factors that may impact the bond market in the short term.
1. Increase in Fed Rates
The Federal Open Market Committee (FOMC) in December 2021 suggested that it might consider increasing the Fed rates by as much as three times.
Due to COVID-19, inflation is at a nearly four-decade high, and the unemployment rate has also not been recovered to pre-COVID levels in the U.S.
Thus, it is likely to increase the interest rates to fight inflation. The increase in Fed rates could affect both developed and emerging nations.
Nearly all the major countries are taking measures to keep in line with the Fed rates. In India, the RBI might also increase the interest rates in the coming months, even though it has not increased since Feb 2022.
The Bank of England (BoE) increased its interest rate by 25bps to 0.50% to hold inflation. The European Central Bank (ECB) kept its interest rate on the deposit facility unchanged at -0.50% but is likely to change in the future.
For bond investors, this means that if interest rates increase, the value of the bonds will fall, resulting in losses for the investors who do not hold the bond till maturity. However, investors who wish to buy bonds in the future and hold the bond till maturity could gain from the rise in interest rates as they will receive a higher coupon.
2. Russia-Ukraine War
There has been news from the past few months that Russia has been trying to invade Ukraine. Due to this reason, globally, the markets are falling, and the volatility is relatively high.
However, it is usually observed that when stock markets are plunging and there are political and economic disturbances, people shift towards a more reliable and safer source of investments, bonds.
Government securities are considered an excellent investment at that point.
3. Budget 2022
According to the Union Budget, the central government is planning to borrow Rs. 14.95 lakh crore through the sale of securities on a gross basis in 2022-23 (April-March), which is a massive amount. This could mean that there will be more supply rather than demand, which will cause bond prices to fall.
We know that prices and yields are correlated, so if prices fall, the yields on the government bonds (which is the safest bonds type in India) will increase. Thus, the new G-secs will come with a higher coupon than the older ones, making it a lucrative option for the investors.
These all factors will impact the interest rates and bond prices in the coming months. Still, an investor is advised to understand the 5 benefits of bond investment, i.e., why a bond as an asset class is good for the portfolio even when the market is in bad condition.
Bonds are considered to be a low-risk investment, as they are backed by the creditworthiness of the issuing company or the government. They also provide stable returns in the form of coupons, which can help to protect the investment portfolio against market volatility.
Bonds also help in diversifying the portfolio, minimizing the overall risk. It is a wise choice for investors looking for stability and modest returns. Bonds are a good investment option for risk-averse investors.
Investors are advised to understand the importance of a bonds portfolio; having a combination of short, medium, and long-duration bonds will help in reducing the volatility and maintaining the liquidity and regular flow of money.
By taking a closer look at the economic and political indicators, and the historical trends for bonds, investors can make a more informed decision about whether or not bonds are right for them.
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