Bonds bleed in RBI bid to save rupee

In what is being seen as one of the sharpest losses for bond funds in years, in just two sessions, net asset values (NAVs) of some of the gilt funds have gone down by as much as 4%. If one considers total losses since May 24 — the day the benchmark 10-year government securities (G-sec) price had peaked in recent months — in some funds, the losses are now about 6.7%, data from Morningstar India showed. Consider this: On July 15, the day the government-RBI combine announced its decision to hike short-term interest rates after all the markets closed, the NAV of Kotak Gilt Investment Regular (Growth) fund was Rs 42.85. On Wednesday, it was down to Rs 40.85. On an average, the 16 gilts funds considered for this analysis, lost 3% each in just two days. Since bonds prices are much less volatile that equities, such losses usually unnerve bond fund investors majorly, market players said. The data also showed that some debt funds have also lost nearly 6.7% since May 24, the day 10-year gilt yield had touched a low of 7.11%. Since bond prices and yields have an inverse relationship, that was also the day the price of this bond had peaked. In less than two months to Wednesday since the peak of recent bond rally, ICICI Prudential Income Opportunities Fund (growth) lost 6.7%, the highest loss among dynamic bond funds category.Of late, with the rate of interest scenario turning slightly doubtful over the last few months, the category had attracted substantial inflows fromretail investors as well. In this category of funds, the average loss for 53 funds was 3% since May 24, data showed. “Lately retail investors have been showing interest in intermediate (dynamic bond) funds and long term funds. In June alone, the total assets managed by these funds more than doubled to over Rs 1 lakh crore and my believe is some of it was from retail investors,” said Dhruva Raj Chatterji, senior investment consultant, Morningstar Investment Management.Industry players, however, blamed these sharp losses to the recent weakness in the rupee, ratherthan on any other fundamental reasons. “The rupee had been weakening for too long and the RBI had to do something to stem its further fall. Fund houses had absolutely no role to play if there are such shocks from the government and the central bank,” said a dealer with a local bond house.