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  • MF News Fixed income market commentary – what to expect in March

    Fixed income market commentary – what to expect in March

    A snapshot of key events in the month gone by and what to expect now.
    Shreeta Rege Mar 1, 2019

    February was a roller coaster month for the debt market. The pro-consumption budget and the surprise rate cut by RBI were the key events in the early part of the month. While higher than expected market borrowing numbers in the budget put a dampener on market sentiments, all welcomed the surprise rate cut by RBI. The second half of the month, however, was more subdued. Markets saw some sell-off by foreign investors in the wake of the Pulwama attack. Overall, markets ended the month on a cautiously optimistic note, as de-escalation seemed likely with Pakistan offering to release the captured Indian pilot. 

    How did funds react?

    Money market and ultra-short duration funds performed well during the month.     

    We talked with Dwijendra Srivastava, Chief Investment Officer (Debt), Sundaram MF, Mahendra Kumar Jajoo - Head - Fixed Income, Mirae Asset MF and R. Sivakumar, Head - Fixed Income, Axis MF to understand market triggers in March and their near term market outlook.

    Key triggers for the upcoming month   

    Jajoo feels that the India Pakistan conflict will be the most critical event in the coming month. Current news flows suggest that the situation is likely to cool down. Unless there are any negative surprises on India - Pakistan front, markets are likely to be guided by RBI’s stance on liquidity and oil prices.

    Srivastava too feels that the geopolitical scenario will be a key trigger in the near term. Moreover, advance tax outflows coupled with government holding huge cash balances to manage their fiscal deficit numbers will lead to tight liquidity in the coming month, according to him.

    Sivakumar expects the market to position itself for an upcoming rate cut.

    Outlook

    With the new RBI Governor being empathetic to growth, Dwijendra expects at least one rate cut of 25 bps before April. This will take the repo to 6%. So far, inflation has undershot RBI target. As per early signs, there is 50% probability of normal monsoon in the coming year. Assuming there is no negative surprise then the current low food inflation will give RBI room to cut rate by another 25bps. The rate cut is likely to have a positive effect on bonds having duration up to 5 years. The 10-year bonds meanwhile may not benefit much from the rate cut due to the supply side constraints that is PSUs sitting on excess SLR investments and high government borrowing to meet fiscal deficit numbers.

    Sivakumar expects money market yields to rise in March in the face of seasonal tightening in liquidity. On policy front, he expects RBI to cut rates by 25 bps in near term. However, he does not view this as a change in rate cycle but a one off event.  

    Jajoo expects markets to remain supportive as long as there are no shocks on India Pakistan front. With RBI aggressively supporting liquidity and growth, a rate cut is likely in the near term. 

    Overall, fund managers seem to be bullish about a rate cut by RBI in April.

    Which funds should you recommend to your clients?

    Sivakumar mentions that markets look most rewarding in the 3 year and below duration bucket. Investors can decide whether to invest in credit funds or high rated debt fund in this bracket based on their risk appetite as both categories are offering attractive yields. 

    Jajoo feels that investors should look at short-term funds as the longer duration papers will not benefit significantly from the rate cut due to supply side concerns.

    According to Dwijendra, investors can consider allocating their funds medium term funds investing in the 3 to 4 year duration bucket.

    Have a query or a doubt?
    Need a clarification or more information on an issue?
    Cafemutual welcomes all mutual fund and insurance related questions. So write in to us at newsdesk@cafemutual.com

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