After 8 months of relentless rise,
bond yields came down in July owing to a sharp fall in the global commodities
prices and the US treasury yields.
Weakening economic activity across
advanced economies and an expectation of recession in the US and Europe
triggered a sharp decline in commodity prices. It also fueled an expectation
that the US federal reserve would not be able to hike interest rates too much
from here.
This, in turn, led to a steep fall
in the US treasury yields. The 10-year US treasury yield fell by 36 basis
points in the month from 3.01% to 2.65%. While the brent crude oil price fell
by 5.4% from USD 114.8/barrel to USD 110/barrel. The crude oil price fell
further in the first week of August to ~USD 95/barrel on August 5, 2022.
Indian bond market followed the
global cues. The 10-year Indian government bond yield fell by 13 basis points
from 7.45% on June 30, 2022, to 7.32% on July 31, 2022. It dipped further to an
intraday low of 7.10% on August 5, 2022, before the announcement of the RBI’s
monetary policy.
The monetary policy committee (MPC)
of the RBI hiked the policy repo rate by 50 basis points from 4.90% to 5.40%. The
50-basis points rate hike was more or less in the market’s thinking. But there
was an expectation that the rate hiking cycle is coming close to its end and
the RBI will be relatively dovish in its statement.
The
RBI’s policy statement was fairly hawkish. At 5.4%, the repo rate is already
above its pre-pandemic level. Yet, the RBI has maintained its policy stance as
‘withdrawal of accommodation’. This suggests that the neutral level of the repo
rate is at or above 6% from where the last rate cutting cycle had started. So,
the rate hiking cycle is not over yet.
The
RBI also seemed concerned about the external sector and its impact on the
Indian Rupee. The worry on the external sector is three folds – the current
account deficit has widened to uncomfortably high levels of more than 3% of
GDP, capital inflows have fallen, and the foreign exchange reserves are
dwindling fast.
Rate
hikes and quantitative tightening in the US and other advanced economies remain
a big risk for capital flows in the emerging markets. Thus, the RBI’s concerns
are justified and it would keep the risk of repo rate going significantly above
6% alive.
The
bond market sold off after the policy announcement with yields moving higher by
15-20 basis points from the pre-policy lows. The 10-year G-sec yield moved up
from the pre-policy bottom of 7.10% to end the day at 7.30% on August 5, 2022.
Given
the bond yields have come down significantly over the last month, there is a
possibility of a further rise in the yields in near future.
However,
from a medium-term perspective, another 50-60 basis points of a rate hike by
the RBI is already in the market’s thinking. Thus, bond yields may not move up
significantly from current levels. We expect the 10-year G-sec yield to find
support at around 7.5%.
In
the shorter end, the yield on up to 1-year debt securities would continue to
move higher due to a potential increase in the policy repo rate and a reduction
in the liquidity surplus in the second half of the year.
Based
on our assessment that much of the rate hikes are already priced in the medium
to long duration bonds, we suggest investors with 2-3 years holding period
should consider adding their allocation to dynamic bond funds to benefit from
higher yields on medium to long term bonds.
Dynamic
bond funds have the flexibility to change the portfolio positioning as per the
evolving market conditions. This makes dynamic bond funds better suited for
long-term investors in this volatile macro environment.
Investors
with a shorter investment horizon and low-risk appetite should stick with
liquid funds. With the increase in short-term interest rates, we should expect
further improvement in potential returns from investments in liquid going
forward.
Since
the interest rate on bank saving accounts are not likely to increase quickly
while the returns from the liquid fund are already seeing an increase,
investing in liquid funds looks more attractive for your surplus funds.
Investors
with a short-term investment horizon and with little desire to take risks
should invest in liquid funds which own government securities and do not invest
in private sector companies which carry lower liquidity and higher risk of
capital loss in case of default.
Data Source: RBI
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video
are for general information and reading purpose only and do not constitute any
guidelines and recommendations on any course of action to be followed by the
reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering /
communicating any indicative yield on investments made in the scheme(s). The
views are not meant to serve as a professional guide / investment advice /
intended to be an offer or solicitation for the purchase or sale of any
financial product or instrument or mutual fund units for the reader. The
article has been prepared on the basis of publicly available information,
internally developed data and other sources believed to be reliable. Whilst no
action has been solicited based upon the information provided herein, due care
has been taken to ensure that the facts are accurate and views given are fair
and reasonable as on date. Readers of this article should rely on
information/data arising out of their own investigations and advised to seek
independent professional advice and arrive at an informed decision before
making any investments.
Risk Factors: Mutual Fund investments are
subject to market risks, read all scheme related documents carefully.
No comments:
Post a Comment