How did the global debt market behave in May-21?

• Unlike the previous months, Bond Yields cooled off across all the markets moderately, as apprehensions over the pace of economic rebound weighed.
• While the economic reopening is leading to recovery, but supply chain issues and increase in raw material costs are throttling the pace of rebound. 
• This fuelled safe-haven demand for government securities, tempering their yields. Additionally, the asset purchase programme by the central banks has been limiting the rise in yields across economies.
• Although yields came off from the highs touched in Mar-Apr’21, it continues to be well above the pre-pandemic levels across economies.

Impact on debt funds in India

• Due to their higher sensitivity to yield changes, longer duration funds have been impacted in the last one week period. 
• India’s 10-year benchmark bond had trended slightly upward towards the end of the month. This has led to funds with higher duration seeing negative returns in the period.
• Money Market, Ultra-short, Liquid Funds have remained largely unaffected to changes in yields due to their lower duration.

Recommendation

Stick to high-quality AAA-rated low-duration funds and bonds. Prefer safety over high yields in this volatile market. In fixed income securities, high risk does not mean higher returns.