Bondman – deuxième partie (Race to Everest)

October 14, 2010 Authored by foolishinvestorindia

Catch me if you can! At the begining of this year I had a view on how debt as an asset class would perform over the course of the year. I had, then, written about it on my (sister site) with the title – Bondman Returns – Revenge of the yields. I am now essentially following it up with the Part II of the Triology of the Bondman series. This deuxieme partie (Part II in French) is where Debt as an asset class is in the thick of action and my triology will end with the triumph of this Bondman.

Intermission is over

Most people in the world and so too in India are hooked to every kinds of asset class. Equities are soaring, Gold is rocking, Commodities are riding and Currencies are winding; while bonds are -Bonds who? Monetary policies, across the globe, over the past couple of years has turned bonds (debt) as an asset class dead meat. There is no hope as yields in the west are lackluster while those in emerging markets have had a frenzied ride – thanks to the soaring stimulus packages of our own and inflationary environment for an extenteded period. This caused M3 (broad money) or money supply an extended performance window – as if there were given steriods and put on the dance floor. This has caused everyone shun debt – every kind; to be dropped from the asset basket. Short term, long term, government or corporate. This was precisely the kind of environment any villan would love to be in. Belt the hero to pulp. We are, as I mentioned, in the part two of our triology. What does that mean? The climax of the asset class is about to happen. The ascent of the evil yields is about to be eclipsed by the assualt from the regulators and consequent withdrawal of the menacing steroids – excess M3.

It’s now or 2018

I believe that the high point of the movie has to be captured on big screen when it is playing out in the full. Participate in this asset class on the longest end of the curve. Lock money that is intended to be put away in FD’s and long duration by investing in government securities/ bonds that are going to come out over the next 3-6 months. The best part of this debt cycle should be over same time next year (when the last of my triology should be showcased) and we could witness amongst the spectacular returns that we think are only possible in asset classes such as equities. Double digit returns – possbily as high as 25%-30% on long bonds / Mutual funds. Rising yields – lock them in! Remember that last such cycle was witnessed in the year late 2002 – early 2003 when debt funds / bonds indeed provided returns in the range of 28%-36%. You are reading it correct – these are debt fund returns. My sense is that we should be in a similar position in no time before either 2018 or 2020 when this cycle would repeat. Therefore between 2012 and maybe 2020 maybe debt would be an asset class that needs to be shunned. But now, grab those rising yields by the collar and be ready for the roller coaster ride towards high returns in the next 2 years.

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