Pro Talk: Dhawal Dalal’s fixed-income playbook
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ETMarkets Smart Talk | Dhawal Dalal’s fixed-income playbook: Stagger bond bets, favour AAA debt
While the near-term rate outlook remains uncertain amid global inflation and energy price risks, the fixed-income landscape continues to offer opportunities across select segments.
In this edition of ETMarkets Smart Talk, Dhawal Dalal, President & CIO – Fixed Income at Edelweiss Mutual Fund, shares his fixed-income playbook for investors.
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As central banks worldwide, notably in Japan, Canada, and the euro zone, signal plans for sharper interest rate increases than the US, global markets prepare for potential volatility. This transition puts traditional bond safety under strain while anticipating a ripple effect on stock valuations and currency fluctuations. Investors are left grappling with the challenges posed by rising inflation and growing geopolitical uncertainty, making this a precarious investment climate.
Dalal believes the bar for a near-term rate hike remains high, but sees the possibility of higher policy rates later this year.
He recommends staggering investments in high-quality bonds over the next 3–4 months, while favouring 2–3-year AAA-rated bonds and money-market instruments for their attractive risk-reward profile.
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He also explains how investors can construct a ₹1 crore fixed-income portfolio with a three-year horizon and why chasing higher yields without assessing underlying credit risks could prove costly. Edited Excerpts –
Q) What is your take on the MPC policy meeting outcome? Do you see interest rates going higher or lower?
A) August MPC was a dovish hold, with the RBI looking through recent food and fuel inflation given benign core inflation trends. We believe the bar for a rate hike in October remains high, although the RBI may still raise rates by up to 50 bps later this year to maintain an adequate buffer over the repo rate.
Q) With the RBI repo rate at 5.25%, are we still in an environment where investors can lock in attractive yields, or has the best part of the rate cycle already passed?
A) This is a difficult question to answer. The prevailing view is that the global inflation cycle has turned higher due to the ongoing WA crisis and its impact on energy prices.
As a result, several central banks are expected to tighten policy rates to address persistent inflation, which should put upward pressure on the short end of the yield curve. However, the long end of the yield curve is behaving differently across various regions of the world.
Q) Is it better to lock in a 7% yield on a high-quality bond today or wait for potentially higher yields if inflation or oil prices push rates up?
A) We believe it may be prudent to stagger investments in high-quality bonds over the next 3–4 months to benefit from cost averaging, as higher policy rates in the coming months could provide opportunities to lock in slightly higher yields.
Q) If you had ₹1 crore to deploy in fixed income today with a three-year horizon, how would you construct the portfolio?
A) Assuming tax neutrality, I would allocate one-third to 3-year Target Maturity Funds, one-third to Ultra Short Term Funds, and the remaining one-third equally between Corporate Bond Funds and Credit Funds. This allocation balances high-quality and accrual strategies while maintaining low volatility and a reasonable degree of certainty.
Q) How should investors divide their fixed-income allocation between government bonds, AAA corporate bonds, credit opportunities and money-market instruments?
A) Given current demand-supply dynamics and the tight spread between the 10-year IGB and 10-year UST, we remain underweight on government bonds.
We are bullish on money market instruments given their attractive spreads over the repo rate, and also favor 2–3 year AAA-rated bonds for their compelling risk-reward profile.
While AA-rated credit spreads have tightened, we expect some reversal as corporate capex picks up.
