Bond markets are pricing in 25-50 bps of rate cuts between Dec 25 and Feb 26, which will take the terminal rate to 5-5.25%
Fiscal situation – which has been a source of comfort in recent years – needs to be carefully watched as tax buoyancy is decreasing even as GST and income tax rates have been lowered. This can put some pressure on bond markets.
As insurance companies – one of the largest buyers of long bonds (30 yr G Secs) – now explore newer avenues that have opened up including enhanced equity allocations and some commodities exposure, the demand-supply situation in long bonds may turn adverse.
So, while the 10 yr G Sec may continue trading in its current range, one could expect yields to harden in the longer end. Expect the yield curve to steepen – the shorter end represents better opportunities while the longer end represents heightened risks.
UTI MF has used the recent bonds rally to cut down duration across funds and is now focusing more on accruals from corporate bonds.
Gold’s record run is telling us that its not just about rushing to a safe haven at times of uncertainty – its perhaps also the starting point of some form of monetary reset which seeks to reduce the dominance of USD as the world’s reserve currency.
For India, the key to watch is how we resolve the trade issue with US – if this doesn’t get resolved quickly or escalates further, our currency can come under pressure – which will in turn put pressure on our debt and equity markets.
Trade uncertainty has also prevented INR from appreciating when USD declined over 10% (DXY) this year – which has challenged the notion that a weak dollar is good for all emerging markets’ currencies and markets.
As US goes protectionist with tariff barriers, while US consumers may be in for higher inflation, this may actually be dis-inflationary for impacted countries that export to US. As these countries scout for newer markets, as Indian exporters turn towards the domestic market, expect heightened competition and lower prices.