Article published in Financial Express on 3 July 2017. Please click here for the link
While the G-Sec yield is the correct benchmark for long-term bond funds, for money market funds track yields on treasury bills.
Certain things seem easy to track, particularly in today’s age of information explosion through various websites and apps. However, in spite of availability of data, you need a proper perspective on what you are tracking, otherwise you will be misled. Tracking bond market For tracking the bond market, the most popular fall-back is the 10-year maturity Government Security (G-Sec) yield. This is the most liquid G-Sec, except during time periods when the 10-year benchmark G-Sec is changing, and there is good reason to track it. What we normally refer to as the 10-year benchmark yield indicates only the yield level at that point of time.
We try to gauge the movement by looking at the movement of the yield, i.e., up or down and the extent of the up-move or down-move. For clarity, it is not the returns from that security over the two dates. If you have investments in G-Sec funds / long bond funds with maturity somewhere around 10 years, you may refer to the 10-year G-Sec yield. If the portfolio maturity of your fund is even longer, say 15 or 20 years, you should refer to the 15-year or 20-year G-Secs also, to gauge the movement of yields over the two dates. Data source
The source of data on G-Sec yields is www.ccilindia.com. On the home page, click on RBI NDS – OM. It gives live data on traded level of G-Secs. The right-most column titled LTY shows the last traded yield. The relevant Gilt for you is the number of years from the current year. For example, the 10-year G-Sec matures in 2027 and the 20-year security matures in 2037. Since all G-Secs don’t get traded every day, you may refer to a nearer-maturity one as a proxy for the maturity you are looking for. If your context is to track a shorter maturity exposure, for instance, a short-term bond fund with portfolio maturity in the range of two to four years, then the 10-year G-Sec is not the right benchmark, due to the palpable difference in maturity.
The impact of relevant economic parameters like inflation, GDP growth, etc., is directionally similar across maturities in the yield curve, but the extent of the impact is different. The shorter end of the yield curve, say, less than one year maturity, is impacted more by banking system liquidity. If system liquidity is surplus, money market yields, defined as maturity less than one year, tends to be low and deficit liquidity pulls up money market yield level. That is to say, longer maturities like 10 or 20 years is influenced by both the view on economic parameters as well as system liquidity whereas the shorter end is influenced more by system liquidity, followed by economic parameters. Yields on treasury bills
For tracking the shorter end, relevant for money market funds, you may refer to yields on treasury bills (T-Bills) as this is the most liquid segment of the money market. You may refer to the source mentioned above for the latest traded levels on T-Bills of various maturities. Please take care of the maturity date; for example, a 364-day T-Bill was of 364 days maturity when issued, but the residual maturity as of today is relevant.
Coming back to the context of benchmarking, for your short-term bond fund with two- to four-year maturity, money market yields are not the correct benchmark as these are of less than one year maturity. The correct benchmark is corporate bonds of relevant maturity, but there is a challenge in getting the data. There are bond dealing houses and some mutual funds who publish daily market updates. If you are not privy to those reports, you may refer to G-Secs of corresponding maturity as a proxy.
The writer is managing partner, Sen & Apte Consulting Services LLP