Fund houses and insurance companies have not been able to tap the recent rally in the bond market due to an earlier decision of duration-cut in their debt papers. According to industry sources, this was because they did not expect the Reserve Bank of India (RBI) to take a dovish stance in the monetary policy review earlier this month.
Duration is measured in number of years and it is a measure of the sensitivity of the price of fixed-income instruments to a change in interest rates. Most bond market experts had expected RBI to hold key policy rates on June 3, but they had also expected the guidance to be hawkish.
According to a senior official with a fund house, the pace of adjustment has been quite fast and fund houses that were running long duration did better than those who had cut duration. “The pace of the rally in the bond market was so fast that even if those who were running short duration wanted to re-orient their portfolio, they would have taken a little bit of time and that time was not there.”
Very few fund managers had average maturity of about 10 years and above in long-term funds. They gained the most when RBI announced a dovish stance. Most fund managers were holding average duration in the range of 4-8 years due to which gains were limited for them.
Some insurance companies had begun to cut duration after the Urijit Patel committee recommendations on consumer price index inflation-based monetary policy and RBI’s decision to increase repo rates.
However, insurance officials say they have been able to book profits on the Ulip fund side thanks to their ability to take an immediate call on the fund positions. A senior investment official explained that the Ulip portfolio has generated returns much more than expected, due to the bond market rally.
On one hand, while life insurers may look at an average tenure of six-to-eight years, general insurers would prefer shorter tenures of one to two years. This is because according to Insurance Regulatory and Development Authority (Irda) rules, life insurers cannot focus too much on short-term and very short-term durations as part of their asset liability management.
Insurance company executives point out that asset liability management over a long period of time is more difficult than over a short period. This is due to market volatility and long-term nature of the bonds.