By Puneet Pal
Volatility was high throughout the last week as markets priced in a lower terminal rate by the US Fed. Markets are pricing in a last rate hike by the US Fed on 22nd March and then close to a 100 bps rate cut from June onwards till the end of the year. This is in sharp contrast to the expectations of a Fed terminal rate of 5.60% with no rate cuts for 2023 just a fortnight ago.
Over the course of the last week, the US Fed and the US treasury worked to stop any contagion impact after the collapse of the Silicon Valley Bank by engineering a USD 30 billion deposit mop-up for the First Republic Bank through 11 large Banks.
This was after the US treasury has assured all the unsecured depositors of Silicon Valley Bank that they will not lose any money. Further, the US Fed also announced a loan program (BTFP – Bank Term Funding Program) which will provide loans for up to a year in exchange for securities, valuing the securities at par, ignoring the market price of the securities.
Thereafter, the action shifted to Europe with Credit Suisse facing the wrath of the market as its biggest investor, the Saudi National Bank refused to put more money, trigging question marks on the Bank’s sustainability. The Swiss National Bank (SNB) had to step in assuring that Credit Suisse has adequate capital and provides a liquidity facility of USD 54 billion to allay concerns. News reports indicate that UBS might be considering a full or partial takeover of Credit Suisse.
Notwithstanding the fragile market sentiments and heightened uncertainty, the ECB raised rates by 50, sticking to its commitment given in the last meeting though it refrained from giving any future guidance. This was slightly surprising for the markets as they had started building a higher probability of a 25 bps hike by the ECB. The US Fed meeting next week is very crucial given the market scenario.
The US bond markets are expecting an imminent recession with the US yield curve bull steepening as the 2-year yield has fallen by 100 bps over the last week. The economic data continues to hold up along with inflation, both in US and Europe. Indian bond yields were relatively stable though the curve steepened with the shorter-end yields falling more than the longer-term yields.
PGIM India Mutual Fund expects the US Fed to hike rates by 25 bps next week, but the crucial aspect will be the future guidance. Nonetheless, we believe that the rate hiking cycle is on its last legs and continue to believe that this is a very good time to invest in Fixed Income as bond yields have risen and risk-reward is favourable for fixed income investment with real yields positive across the curve.
(Author is Head-Fixed Income, PGIM India Mutual Fund)