PTCs and mezzanine debt offer exciting opportunities
CIO – Fixed Income, Edelweiss AMC
WF: What do you make of the surprise announcement of lower Government borrowings in 1HY2018-19? What implications does this have on our bond markets going forward?
Dhawal: Market participants were pleasantly surprised by a sharp reduction in the borrowing amount for H1 FY19. Sensing the sombre mood, the government not only cleverly reduced the quantum of bonds but also reduced the supply pressure in 10-14Y segment by shifting them to short and medium segment of the yield curve and making them more palatable to market participants.
With this, we believe that the government may have addressed the supply concerns of market participants in H1 of FY19. This should result in improvement in sentiment and could result in further reduction in bond yields.
WF: Until a couple of weeks ago, market expected gradual hardening in interest rates over this fiscal. Has the outlook changed for FY18-19?
Dhawal: A relentless increase in bond yields for seven consecutive months had pushed government bonds in “oversold territory” by a number of measures. Indian government bond yields stabilized in March after selling pressure abated amid decline in G7 bond yields.
What was surprising was that the entire hardening of government bond yield had happened without any significant deterioration in India’s economic parameters, volatility in the FX markets or Balance of Payment issues. With the power of hindsight, the upward move could be attributed to market participants’ concerns on demand-supply imbalance for FY19 and prospects of higher fiscal deficit for FY18 and FY19 amid lower-than expected collection in non-tax revenues.
We believe that the government is likely to achieve its FY18 fiscal deficit target of 3.5%. Along with that, the recent measure to reduce the gross borrowing by Rs. 50,000 crore may have further improved market participants’ confidence in government’s ability to manage their finances in an effective manner.
Based on that, it is fair to say that expectations of rate increases have subsided for the time being. However, market participants will closely follow upcoming monsoon, evolving political scenario and trend in tax collections for FY19.
WF: There is a lot of talk about the need to increase foreign borrowing limits beyond 5% and to participate in international bond indices. Why are these important and what implications can they have on our bond markets?
Dhawal: FPI participation in Indian bonds have provided market participants with a solid anchor in our opinion. FPIs have invested close to Rs. 2.8 trillion in Indian bonds since CY2014. Not only their investments have been more stable but also have proven to be counter-cyclical as well. They add when yields rise and book part of gains when yields decline. FPIs are 3rd largest participants in Indian bond market after Banks and Insurance companies.
We believe that further increase in FPI limits in Indian bond market will help us attract stable investments from all over the world and help government reduce their cost of borrowing.
WF: What changes have you made in your fixed income products consequent to implementation of the SEBI mandated product rationalization initiative?
Dhawal: Edelweiss AMC being a young AMC had most of their schemes mapped out in line with SEBI’s recent initiative on scheme categorization. That said, in order to be True to Label and serve our clients better we have made the following changes in our fixed income produce suit:
We believe that these repositioning of fixed income schemes will not only result in sharper focus on schemes but also result in apple to apple comparison with other similar category funds.
Edelweiss Fixed Income Product Suite
Macaulay Duration and Credit Profile is indicative.
WF: How are you positioning your fixed income products in the current market context?
Dhawal: We had maintained a defensive positioning when yields were trending higher. With both the Government of India and the RBI accommodating concerns of market participants, we believe that demand-supply imbalance has been addressed. This should result in sustained improvement in sentiment and normalization of participation going forward. Based on that, we have become more constructive on the bond market in the medium-term and have increased duration of some of our funds.
That said, we are closely following crude oil prices, geo-political risk, emerging political developments and government’s tax collection trend for further cues.
WF: Where do you see the best opportunities now in the fixed income space?
Dhawal: Apart from opportunities in duration space, we are excited with emerging opportunities in pass-through certificates (PTCs) and mezzanine debt amid a gradual pick-up in economic activities and tight flow in bank credit. We believe that Edelweiss Mutual Fund is in a unique position to capitalize on Edelweiss’s strength in different domains and add value to our clients and partners in various unique ways.
Disclaimer: Mr. Dhawal Dalal is the Chief Investment Officer – Fixed Income of Edelweiss Asset Management Limited (EAML) and the views express above are his own.
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