Conflicting regulatory statements are impacting sentiment
Head – Fixed Income
WF: With the recent turbulence in the currency and inflation looking like inching up, is the case building up for an RBI rate hike?
Sivakumar: Ever since the release of the MPC minutes from the April meet, bond yields have seen a significant spike across the curve. The currency move has been in tandem with global events and the move of the dollar index. However, the INR continues to remain one of the best performing EM currencies over the last 5 years. Significant policy actions by the government and the RBI have improved India`s ability to handle external pressures post the 2013 deterioration in fiscal position.
Crude prices have seen their highest levels in 4 years’. India being an oil importing nation is highly sensitive to movements in crude prices. Sustained high levels in crude oil is likely to impact inflation and will play a material role in the RBI`s policy going forward
We anticipate that the RBI will maintain its status quo and may consider other policy actions to stabilize the market.
WF: Recent months have been unusually turbulent for fixed income markets, with outlook changing very frequently. What’s causing this turbulence and how do you see the road ahead for markets over the next 12-18 months?
Sivakumar: The MPC left the key policy rates unchanged in its latest policy review. The tone of the policy however was mildly dovish on the back of the recent fall in headline CPI numbers. The tone does assign some upside risks on account of crude prices and food inflation. In comparison, the policy minutes were much more ‘hawkish’ in comparison, especially where one member of the MPC suggested switching from the neutral stance to beginning the process of withdrawal of accommodation. This has significantly affected market sentiment. The surge in crude prices coupled with the fall in currency has further exasperated market participants into a state of ‘Bid-lessness’ in the marketplace.
The rise in bond yields across the spectrum and the curve have created pockets of opportunity for long term investors looking to lock in bond yields at attractive rates. Corporate bonds currently offer significant opportunities in the 1-3 years’ space on a risk reward basis and are ideal for investors looking to lock in money over the next year.
WF: Is there a case for investing in duration strategies now or should we stay clear of them?
Sivakumar: The 1-3-year segment (short segment) is likely to see heightened activity with the RBI`s move of bringing foreign investors into the market. 1-3 year yields are currently trading at 200 basis over the operating rate. Yield curves across the spectrum have seen upward movements following the G-Sec trends. Ample liquidity and attractive spreads over the overnight rate still offers some opportunity. Hence 1-3-year space is likely to offer superior risk reward opportunities. Duration strategies in the current volatile period may not be ideal for investors at this juncture.
WF: How are you positioning your Short Term Fund and your Strategic Bond Fund in terms of portfolio strategy?
Sivakumar: Axis Short Term Fund follows a high quality & low-risk strategy endeavouring to generate stable returns. It aims to capture opportunities in the yield curve spreads in the short duration segment. Currently, the portfolio allocation is skewed towards 1-3 year corporate bonds and money market instruments. This positioning is expected to benefit from the compression in spreads in the short to medium term segment of the curve on account of surplus liquidity. The corporate bonds exposure remains mainly in higher rated instruments. The current duration of the fund is 1.5 years.
Axis Strategic Bond Fund (Erstwhile Axis Regular Savings Fund) is currently positioned to benefit from its core allocation in medium term corporate bonds i.e. in the 1-3-year space. The fund typically invests with a 60:40 mix in favour of non - AAA bonds. However, given the risk reward opportunity in the AAA segment incremental flows have been deployed in the AAA category. The current YTM of the fund is 9.01% with and average maturity of 2.4 years
WF: How would you guide distributors to choose between these two products for different clients and circumstances?
Sivakumar: The two funds cater to different audiences. The Axis Short Term Fund caters to the institutional segment and investors who have a lower risk appetite and prefer investing only in highly rated instruments. The target investment horizon for investors in this category is 12-18 months. The Axis Strategic Bond Fund is ideal for investors looking for accrual income and are comfortable with lower rated securities. The ideal investment horizon for this fund is up to 3 years.
WF: Where do you see the best opportunities today in fixed income markets?
Sivakumar: We believe that short term bonds offer significant opportunities on a risk reward basis especially AAA securities. AAA bonds have retraced back to 2015 levels. Given the difficulty in judging the RBI’s stance on monetary policy, the global rate outlook and the state of the fiscal, we prefer to stay out of the long end of the curve.
WF: What are the key risks you are watchful about now?
Sivakumar: The RBI continues to make conflicting statements affecting market sentiments in the process. This has hampered the ability of market participants to adequately gauge monetary policy and price Indian debt.
On the global front, the US 10-year treasury rates have crossed the 3% mark for the first time since 2013. Most emerging markets have seen their currency and bond markets roiled by outflows. A strong dollar and oil hit US$80/barrel have caused jitters in the domestic markets. Further, rising oil prices have once again raised fears of fiscal slippages. The RBI estimates that the fall in price of oil after 2014 has resulted in a saving of close to 0.5% of GDP in deficit in FY2018
Source: Axis MF Research
Data as on: April 30, 2018
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