While Government bond yields have outperformed corporate bonds, the high carry available in corporate bonds still continues to lure investors.
CY 2019 in so far seems like a stark contrast in comparison to 2018. Rate hike expectations in 2018 have paved way for actual rate cuts in the current scenario. US FOMC has taken a V turn in its stance from hawkish to dovish overture. Needless to say, the extreme paranoia on the credit from in mid-2018 has now given way to some tolerance for credit assets. Liquidity is now reasonably better in contrast to very tight conditions witnessed just two quarters back.
While Government bond yields have outperformed corporate bonds, the high carry available in corporate bonds still continues to lure investors. Retail inflation (read CPI) in India seems to be on the wane and doesn’t seem ominous for now. Global economy at this juncture is not firing all cylinders which allows for some headroom for monetary accommodation. With NBFCs on a back burner with respect to lending, the onus of credit transmission largely rests on Indian banks.
India seems to have taken a cue from the developing macro indications and we saw a benchmark repos rate cut in Feb 2019 Monetary policy committee meeting. Since then, we have seen US Treasury yield ease by almost 20 bps (0.20%), INR appreciate versus USD and marginal easing in Indian sovereign benchmark yield too. While crude oil has inched up, it doesn’t seem to be much of a concern for now. The short end of the yield curve already seems to be pricing in rate cuts in the upcoming MPC meeting and seems like for now stage seems set to see a rate cut of 25 bps (0.25%) in the policy on 4th April.
The premise of need for credit transmission, global factors, liquidity infusion among other things could hog the limelight. There is an outer chance of a stance change in policy, which will be perceived bullish by market participants. Risk of fiscal overshoot and the political uncertainty due to upcoming elections, however, could prevent and sharp rally in bond prices. Risk reward wise, a judicious mix of short and medium tenor assets could be overweight in such a market scenario.
- By- Lakshmi Iyer, CIO (Debt) & Head- Products, Kotak Mutual Fund