On May 16, credit rating agency Moody’s downgraded the US credit rating from AAA to AA1. The reason given was the rising debt levels of the US government.
In recent years, interest in US bonds among Indian investors has grown. Currently, there are 5 mutual fund schemes in India that invest in US bonds.
However, these funds are not accepting new investments due to the overseas investment limits set by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).
The recent rise in US bond yields has brought these schemes into the spotlight. After the downgrade by Moody’s, bond yields in the US have jumped sharply.
30-Year US Bond Yield Crosses 5%
On May 21, the yield on US 30-year bonds rose to 5.089%, the highest since October 2023. The 10-year bond yield also increased to 4.59%.
When bond yields rise, it benefits new investors because they can buy at a lower price and get better returns. But existing investors may face losses.
This happens because bond prices and yields move in opposite directions — when bond prices fall, yields go up, and vice versa.
Moody’s Downgrade of US Rating
Moody’s downgraded the US rating on May 16 due to its growing debt. Other agencies have also done this earlier — Fitch downgraded the US in 2023, and Standard & Poor’s did it back in 2011.
Experts believe the downgrade is more symbolic and won’t cause major practical effects.
Short-Term Impact on NAV of Mutual Funds
According to experts, the Net Asset Value (NAV) of Indian mutual funds investing in US bonds might see short-term changes.
Mayank Mishra, Vice President at INDmoney, said that the downgrade could lead to short-term price changes in bonds, affecting mutual fund NAVs.
However, over the medium to long term, these funds are expected to give stable returns.
Advantages of Investing in US Bond Funds
Kaustubh Gupta from Aditya Birla Sun Life AMC highlighted that US bond funds offer several benefits.
They help diversify investments during global uncertainties and protect investors from major drops in Indian stock markets. They also offer protection when the rupee weakens against the US dollar.
These funds are especially useful for people who have to make payments in dollars, such as Indian students studying abroad or people planning to move overseas, as they act as a currency hedge.
