Government Bonds Attract Investors Amid Stock Market Volatility

Market Volatility and Bond Investing: What You Need to Know

Amid heightened market volatility, falling gold prices since the onset of the US-Iran conflict, and a hit to investors' risk appetite, investors are grappling with a key question: Is it the right time to increase exposure to government bonds?

The US-Iran war has increased macroeconomic risks, with rising oil prices fuelling concerns over a spike in inflation and the possibility of tighter monetary policy globally. This has created an environment of elevated uncertainty. There is also growing speculation that even after the Middle East conflict is resolved, the impact of the energy shock may persist for some time.

The Case for Government Bonds

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The prevailing environment appears suitable for bond investors. However, before buying them, one must understand how they function and whether it is the right time to buy them. A well-diversified portfolio comprising equities, gold, and bonds is generally considered an ideal foundation for long-term investing.

Understanding Bonds and Bond Yields

One of the thumb rules of successful investing is to maintain a well-diversified, all-weather portfolio. Portfolios should be periodically rebalanced in line with evolving market conditions, and investors may need to increase or reduce exposure to certain asset classes over time.

A bond is similar to a loan, where the issuer takes money from an investor and offers a certificate, a bond. The yield is the interest investors earn on that loan. When a bond is listed and traded in the market, its yield changes with the market's conditions.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

The Relationship Between Bond Prices and Yields

When a bond is listed and traded in the market, its yield changes with the market's conditions. When bond prices rise, yields fall, and when bond prices fall, yields rise. This is why bond prices and yields move in opposite directions.

Is it the Right Time to Buy Government Bonds?

With inflation risk rising, the RBI is expected to hike interest rates in the near future. Experts say wait at least till the RBI's June policy meeting before buying any government bond. Buying government bonds also depends on duration and tenor.

According to Paresh Bhagat, CIO of Veer Growth Fund (AIF), and Chairman at Mangal Keshav Financial Services, government bonds offer safety, but not necessarily good returns at current levels. "With 10-year yields around 7%, an aggressive shift toward long-duration government bonds is not recommended right now," Bhagat said.

However, if the RBI succeeds in arresting the rupee's fall and inflation remains contained, rate hikes could be delayed, keeping government bonds attractive. Shruti Jain, Chief Strategy Officer at Arihant Capital Markets, highlighted that the 10-year government bond yield is around 6.8–6.9%, which is attractive.

A growing economy with stable tax revenues means the government is less likely to face stress in servicing its debt. This reinforces the safety of sovereign bonds.