Fixed income funds sense rate hike pause

A look at the average maturities of dynamic bond funds seems to suggest that most fund managers are betting on a possible pause in the rate hike cycle in the near term.

A look at the average maturities of dynamic bond funds seems to suggest that most fund managers are betting on a possible pause in the rate hike cycle in the near term. The average maturity of all dynamic funds (as a category) has increased from 1.24 years in March 2011 to 2.09 years at the end of July 2011.

Dynamic bond funds allow fund managers the flexibility to manage the duration of the fund,depending on the interest rate environment. The fund managers view gets reflected in the maturity profile of the funds and its duration.

The average maturity of these funds had peaked in September 2010 (at 4.03 years) and has been reducing since then till March this year. Ten of the 17 dynamic bond funds have seen their average maturity rising between March and July this year. The most aggressive among them,in increasing their exposure to longer tenor papers,have been Reliance Dynamic Bond Fund (average maturity increased from 1.33 years in March 2011 to 7.41 years in Jul 2011) and SBI Dynamic Bond Fund (average maturity increased from 0.20 years in March 2011 to 4.78 years in Jul 2011).

A look at the maturity profile of bond funds would indicate that majority of fund managers are building in a possibility of a pause in the rate-hike cycle by the RBI in the near term,and a softening in bond yields as a result of that, says senior research analyst,Morningstar,India,Dhruva Chatterji.