the selling itself is not the interesting part. the interesting part is that equity and debt are falling together. oil shock = inflationary, not recessionary. inflation expectations go up, yields go up, bond prices fall at the exact moment they were supposed to protect you.
for someone holding G-Secs or thinking of buying, what is the right framework here?
The inverse correlation breaking is the real story and it is worth being precise about the mechanism.
The classic 60-40 portfolio worked because most historical shocks were demand side. Economy slows, equities fall, central bank cuts rates, bond prices rise. The assets moved in opposite directions and you got diversification benefit.
A supply side oil shock is structurally different. It causes inflation and slower growth simultaneously. Central banks cannot cut to stimulate because inflation is already elevated. So the rate cut tailwind that would normally lift bond prices does not come. Equity falls on growth concerns, bonds fall on inflation concerns, both drop together.
That said, this kind of correlation breakdown is typically temporary. Once the supply shock resolves or inflation expectations stabilise the inverse correlation tends to reassert. The historical pattern is clear on this. The question is duration, not direction.
I’ve been through 2008 and 2022 and this pattern is familiar. Scary in the moment, less scary once you remember what bonds are actually for.
If you bought a G-Sec at a certain yield and you hold it to maturity, none of this matters. The RBI doesn’t default. Your coupon comes in. Your face value comes back. The mark-to-market loss on screen is not a real loss unless you sell.
The institutional managers selling now are not making a view call about the economy. They are managing redemption pressure and rebalancing portfolios that drifted below their equity target when markets fell. Their mandate forces them to sell. You have no such mandate.
okay but if MFs sold more bonds in March than any month in recent history that has to mean something right? like they’re not all wrong at the same time
Some of it is mechanical and not a directional view at all. When equity falls sharply, a 60-40 portfolio’s equity weight drops to say 55. The manager sells bonds and buys equity purely to restore the target allocation. That creates bond selling pressure that has nothing to do with their view on yields or inflation.
Some of it is a genuine view call from active funds who think yields will go higher and want to cut duration now and buy back cheaper later.
The two are very different rationales but show up as the same action in the data. Which is why aggregate MF flow numbers are harder to interpret than they look.
something i noticed looking at the yield curve data. short duration yields have actually fallen while long duration yields spiked. that’s not a uniform rate rise expectation. the market is specifically pricing long term inflation risk while still expecting short term rates to be manageable.
read a similar observation somewhere last week, people were saying T-bill yields on 91-day paper are still benign while the 10-year is where all the pain is.
practical point: if buying now, 2 to 4 year tenure is where the curve makes most sense. the long end is where all the uncertainty is concentrated right now.
The discount to face value angle is what most people are missing in this discussion.
When institutional sellers push G-Sec prices below face value, a retail buyer who holds to maturity gets two components of return simultaneously. The coupon payments at the original rate, plus the capital appreciation back to face value at maturity. A 7.5% coupon bond bought at Rs 85 gives roughly 8.8% on coupon alone plus 1.5% per annum capital gain over 10 years. That is 10 to 10.5% annualised, sovereign guaranteed.
The irony is that the institutions creating the selling pressure are also creating the entry opportunity for retail investors with a longer horizon.
Sushant’s point on the discount is key and it changes the framing completely.
the risk for a buy-and-hold retail investor is not G-Sec default. it is duration risk. if inflation stays elevated for 3 to 4 years you would have been better off in short duration instruments you could roll at higher rates. that’s a real consideration. but it is very different from the credit risk narrative the headlines are pushing.
stay short to medium tenure, AA and above for corporates, don’t chase the 12% yields from stressed issuers right now.
okay Sushant’s math actually helped. so the scary selling by MFs is literally creating a discount and that discount is better entry for me if i hold to maturity.
i was about to panic and not buy anything this month. might actually do the opposite now lol
both falling together = bad for 60-40 traders
for buy-and-hold = price movement is noise
MF selling = discount = better entry yield
G-sec default = not a real risk
what to avoid = long duration, low rated, high yield issuers right now