Thursday, 27 July 2023

Favorable backdrop for medium to long duration bonds - Comment by Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund

Comment :

  • The US Federal Reserve hiked its key interest rate by 25 basis points – taking the Fed Funds rate to 22 years high of 5.25%-5.50%.
  • The statement suggests that future actions will be data dependent. If inflation move above the Fed’s expectation, they will hike rates. If it remains on the expected declining path, the Fed will pause.
  • The policy outcome was broadly in line with the market expectation. Thus there was no material impact on the bond markets. The US 10 year treasury yield fell by 2 basis points to 3.86%.
  • With FED policy uncertainty  out of way, Indian bonds opened on a positive note. The 10 year Indian bond yields down 1 basis points.       

Our take

  • We maintain our view that the rate hiking cycle has either completed already or very close to its end.
  • In the US, current level of interest rates are significantly higher than their normal levels in the past 20 years. Thus, there is a high probability of rate cuts some time in 2024.
  • This is a favourable backdrop for medium to long duration bonds.

What should Investors do?

  • Dynamic bond funds for long term fixed income allocation
  • Liquid fund for short term cash deployment and emergency corpus

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