While most fund managers believe that the bonds bull market is over and its time to focus on accrual now, Shriram strikes a contrarian note.
Most fund managers are weighing the coming one or two rate cuts against the demand-supply equilibrium which has turned a bit unfavourable to make the case that the coming rate cuts are unlikely to enable yields to drop lower.
Shriram says RBI is keenly tracking liquidity in the system and might well come up with OMOs in the near term to assuage market’s concerns on higher supply coinciding with lower demand at the margin. This can change the sentiment on demand-supply and allow for yields to potentially drop a bit more.
Reacting to views that fiscal discipline is slipping, Shriram says that the Central Government continues to maintain fiscal discipline even in these challenging times. State Governments however are a different story and that’s where oversupply concerns are coming from. That said, it appears that RBI and the Centre are moving towards limiting excesses in this space.
Demand shrinking at the margin – especially from real money investors (PFs, pension funds, insurance companies) – is a real concern. That said, spreads have widened considerably already and the curve is now quite steep – one can argue that this has now been priced in.
HSBC MF’s duration strategy is now more balanced while retaining its optimistic outlook. Preference is more for example for 5-7 year papers rather than 30 yr papers. Duration has moderated somewhat across strategies but remains well positioned to capture another small rally which the fund house expects in the near to medium term.
Interesting opportunities with healthy yields have opened up in the AA range of 2-3-4 year papers. Shriram says the best way to participate in this is through a broad mandate fund like the HSBC Medium Duration Fund which allocates a sizeable but not excessive amount to these opportunities. He believes this may be a better bet for investors than say credit risk funds that may take much larger exposure to this segment.
Experienced savvy investors can consider a measured exposure to duration strategies with a 4-5 month perspective as the markets may well go against current consensus opinion and head for another leg down on yields perhaps before March 26.