Debt Outlook: Here’s a glimpse into February 2023

The 10-year g-sec hovered around 7.30-7.35% in January 2023 and debt returns were broadly between 5.75% and 6.50%. Should you expect this trend to continue? Or should you expect a wide deviation?

Let’s have the industry experts answer these questions.

Deepak Agrawal, CIO, Debt Fund, Kotak MF

• Key triggers - There are 3 key events that define the near-term outlook - FOMC (Federal Open Market Committee), the union budget and RBI MPC (Monetary Policy Committee). RBI is likely to change its monetary policy stance to ‘neutral’ and deliver the final rate hike in this cycle taking the repo rate to 6.50%.

• Expected range - We expect 10-year g-sec to trade in the band of 7.10-7.50%. And, the 1/2/3 year PSU curve which is trading between 7.60% and 7.75% is likely to remain under pressure due to tight liquidity and supply of NCD (Negotiable Certificate of Deposit) /CD (Certificate of Deposit).

• Suggested funds - At the current juncture, it is advisable to invest in short duration, medium duration and dynamic funds

Sandeep Bagla, CEO, Trust MF

• Key triggers - The union budget and the RBI/MPC meeting are likely to impact the market yields. The market is expecting another 25-50 bps hike in the RBI meet and keenly waits for the US Fed meeting that could determine the bond market direction.

• Expected range - While the 10-year g-sec is likely to trade between 7.30-7.50%, the short end of the curve is fairly steep, indicating that the rate hike is already baked in the prevailing yields. Further, the liquidity is likely to remain tight and debt schemes could generate returns in the of range 6-7%.

• Suggested funds - Of the total debt portfolio, MFDs could suggest a 40% allocation to short term funds, 40% to banking & PSU debt/corporate debt funds and the balance 20% to long term funds.

Vikrant Mehta, Head Fixed Income, ITI MF

• Key triggers - The union budget and the FOMC and RBI MPC meetings are the key drivers for the market hereon. While the central banks are likely to increase policy rates, the post-policy media interaction will give future cues on the policy rate trajectory. 

• Expected range - We expect the 10-year g-sec to broadly trade between 7.10% and 7.60%. 

• Suggested funds - This appears to be an appropriate time to increase allocation to actively managed duration strategies.