Benchmark 10Y Government Bond 9% - Favourable Risk - Reward for Investors

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1 Benchmark 10Y Government Bond 9% - Favourable Risk - Reward for Investors November 26, Y Government Bond Yield has been trending higher after the Credit Policy on October 29, 2013 Movement in 10Y Bond Yield Dhawal Dalal Executive Vice President, Head - Fixed Income DSP BlackRock Mutual Fund Movement in 10Y & 14Y Bond Yields Spread between 10Y & 14Y has narrowed by around 30 bps since Oct 30, Y Bond Yield 10 Y Bond Yield Page 1 of 5

2 Key factors that drove 10Y Yield higher: INR s relative under-performance against the US Dollar EM currencies were under pressure in the first-half of November Supply concerns in November Rs. 75,000 crore worth of government bond supply in November FII s continued selling of Indian debt securities After selling around Rs. 14,000 crore worth of Indian debt securities in October 2013, FIIs sold around Rs. 3,300 crore worth of Indian debt securities till November 14, 2013 Market participants have been switching out of the benchmark 10Y and into 8.28% GOI This has resulted in narrowing of spreads between them from around 30 basis points on October 29, 2013 to near parity as on November 19, 2013 In our opinion, this has caused the 10Y Government Bond Yield to move up above 9% - a level not seen since Aug 28, Benchmark 10Y Yield chart since Y Bond Yield is trading at the upper band of its trading range The above chart of the closing level of the benchmark 10Y government bond yield makes a compelling case to invest in benchmark 10Y government bonds at a yield above 9% level. Number of total observations: 2,512 Number of days when 10Y yield closed above 9% level: 37 Average YTM in the last ten years: 7.48% Mean YTM in the last ten years: 7.74% Mode YTM in the last ten years: 7.91% It is worth noting that the benchmark 10Y government bond yield has closed above 9% level only on 37 occasions out of a total of 2,512 trading sessions in the last ten years - i.e. 1.47% of the time! Page 2 of 5

3 3. Improving macro-economic landscape may support Government Bonds in the near-term Local Factors FCNR- B inflow above initial estimates CPI & WPI Inflation are closer to their peak Repo Rate likely to 8% by Dec 2013 Improvement in trade data Current Account Deficit Fiscal Deficit Global Factors Fed tapering risk & its implication for bond yields in the near-term EM debt & currency flow Likely inclusion in Global Bond Indices FII sentiment towards Indian Assets G3 Central Banks Guidance RBI s Liquidity Support Green color denotes factor contributing to positive market sentiment, Blue color denotes status quo while Red color denotes factor contributing to negative market sentiment 4. Spread Between the Repo Rate & 10Y Government Bond Yield since 2010 Spread between 10Y and Repo Rate tends to narrow once the rate hike cycle is closer to its peak Spread between the Repo Rate (operating rate since 2010) and the benchmark 10Y government bond yield has widened to around 128 basis points as on November 19, We believe that there is scope for narrowing of this spread going forward as market participants will begin to price in status quo in the RBI s monetary policy stance, once the Repo Rate reaches 8% Page 3 of 5

4 5. Risk Reward trade-off for a target yield of 8.50% on the benchmark 10Y Government Bond The above-mentioned table and chart is making a clear point that the risk-reward ratio is in favor of the investor at current yield levels, in our opinion. We recommend investors to consider investing at the current level of 9% YTM on the benchmark 10Y government bond for a target of 8.50% YTM any time between April 2014 and June We suggest that investors should consider investing in DSP BlackRock Government Securities Fund, DSP BlackRock Bond Fund as well as DSP BlackRock Strategic Bond Fund depending upon their risk appetite and investment horizon. (Please refer page no. 5 for product labeling details and disclaimers) At the same time, we believe that bond yields may exhibit higher volatility and the 10Y yield could trend higher from its current level in the near term. However, we believe that any further increase in yields should be viewed as an attractive buying opportunity. 6. What could go wrong? Local Factors Global Factors Further slowdown in economic growth - Unlikely, as the government is focused on easing policy bottlenecks and accelerating economic growth momentum Further depreciation in INR - may happen in case of a sharp sell-off in EM bonds & currencies or in case of a sudden escalation of geo-political tensions Sudden surge in geo-political risk - Moderate risk Sharp increase in global bond yields - Lower risk FII outflows from EM - Moderate risk Page 4 of 5

5 Product Labeling: DSP BlackRock Bond Fund Income over a long-term investment horizon Investment in money market and debt securities DSP BlackRock Government Securities Fund Income over a long-term investment horizon Investment in Central government securities DSP BlackRock Strategic Bond Fund Income over a medium-term investment horizon Investment in money market and debt securities *Investors should consult their financial advisors if in doubt about whether the scheme is suitable for them. Note: Risk may be represented as: Investors understand that their principal will be at Low risk risk (Yellow), Investors understand that their principal will be at High risk (Brown). (Blue), Investors understand that their principal will be at Medium In this material DSP BlackRock Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. All figures and other data mentioned in this material (unless otherwise specified) are as on November 26, 2013, may change as subsequent market condition vary and the same may or may not be relevant in future. The data or figures mentioned in this material shall not be construed as indicative yields/returns/ guarantee any performance of any of the Schemes of DSP BlackRock Mutual Fund. Investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of DSP BlackRock Mutual Fund. Past performance may or may not be sustained in the future. For scheme specific risk factors and more details, please read the Scheme Information Document, Statement of Additional Information and Key Information Memorandum of respective Schemes available on ISC of AMC and also available on Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Page 5 of 5