Introduction
Bonds have lost 10% so far in 2022, one of the worst returns in US history, due to soaring inflation. The Fed raised interest rates by 0.5% point on 11th May, the biggest jump in 22 years.
However, bond investors’ worst days may be over. Those who sell bonds now after buying them high may be making a mistake.
Many people appear to be terrified of losing money as interest rates climb. A steady increase in rates, on the other hand, is not terrible for bond investors as long as inflation remains under control.
Over time, the overall return of bonds is determined by their income rather than price movements.
Factors impacting the bond market
A few factors which are impacting the bond market are:
1. Rising Inflation
India’s headline retail inflation hit an eight-year high of 7.79% in April.
With the current situation being so uncertain, there is a lot of pressure on the financial market. Inflation is on the rise, and as such, interest rates are on the rise too, which directly affects bond prices.
The central bank may have to take action to combat inflation, even if it means higher interest rates and tighter financial conditions for the economy as a whole.
So far in 2022, the yield on the 10-year benchmark government bond has risen by 79 basis points.
2. Increase in Fed Rates
Recently, the Federal Reserve hiked interest rates by 0.5% point on 11th May, the biggest jump in 22 years.
On 11th May 2022, the RBI raised its repo rate from 4% to 4.40%. These measures are being taken to curb inflation.
The rate hike might have an impact on our economy and the markets.
If interest rates rise, the value of bonds falls, resulting in losses for investors who do not retain the bond until maturity.
Investors who plan to acquire bonds in the future and hold them until maturity may benefit from the increase in interest rates since they will receive a bigger coupon.
3. Russia Ukraine War
The ongoing conflict between Russia and Ukraine has added to the global market’s challenges.
Investor sentiment has been harmed by a deteriorating economic outlook, the ongoing Russia-Ukraine conflict, commodity price volatility, persistent FII selling, and rising bond yields.
When stock markets fall, and political and economic unrest occurs, individuals tend to gravitate toward bonds, which are a more trustworthy and safe source of investment.
At that point, government securities are considered a significant investment.
Is this best time to buy bonds? In the following months, all of these factors will affect interest rates and bond prices. Even when the market is in horrible shape, a bondholder needs to understand why to buy bonds in India, and why they are a good asset class for their portfolio and one even needs to select the right bonds to buy.
Conclusion
Bonds are a good investment option because they are more stable than stocks and offer a steady income stream.
Further, bond investing is a wise investment option if a person wants to mitigate risk and protect their wealth.
Bonds are one of the safest kinds of investments a person can make.
Investors may make a better choice about whether or not bonds are suited for them by looking at economic and political indicators and past bond trends.
To know the best bonds to buy in India, visit https://www.bondsindia.com/.