Debt Outlook: May 2024

Markets continued to be volatile in the month of April due to various factors ranging from geopolitical risks emerging out of the Israel-Iran-Gaza war, Ukraine-Russia war and the delay of rate cuts by the United States coupled with high inflation.

On the other hand, domestic cues were a respite for the industry with the Consumer Price Index being in line with market expectations and RBI maintaining its status quo with regard to both its policy rate and stance.

So, what does the coming month hold of debt market?

Let’s hear from experts Mayank Prakash, Deputy Head of Fixed Income Baroda BNP Paribas Mutual Fund, Neeraj Jain, Fund Manager, Fixed Income, Trust Mutual Fund, Puneet Pal, PGIM Mutual Fund, Rahul Pal, CIO – Fixed Income, Mahindra Manulife Mutual Fund and Sandeep Agarwal, Head, Fixed Income, Retail Business, Sundaram Mutual Fund.

Mayank Prakash, Deputy Head of Fixed Income Baroda BNP Paribas MF

• Headwinds are expected in global bonds due to imminent FED rate cut and higher inflation
• G-secs will be driven by global monetary policy and domestic demand supply
• Liquidity in the banking system may come under pressure due to GST outflows and foreign exchange intervention. However, RBI is expected to provide temporary liquidity support
• The short end of the curve looks attractive at current levels with more than historical average spreads over operational overnight rates

Funds recommended

• Low duration and short-term funds are suitable for short term whereas gilt funds are suitable for investors with long term horizon

Neeraj Jain, Fund Manager, Fixed Income, Trust MF

• Markets are likely to experience some volatility due to swings in the US yields and continued geo-political uncertainties
• The 10-year benchmark bond is likely to trade in the range of 7.10%-7.30%
• The yields on the short end of the curve are expected to increase as banking system liquidity goes into deficit territory
• The liquidity in the banking system will be tightened considering reduced capex and upcoming election

Funds Recommended

• Short duration bond funds and corporate bond funds can be preferred at this time

Puneet Pal, Head - Fixed Income, PGIM India MF

• Debt markets are expected to be stable for the coming month but a keen eye has to be kept on US yields movement as it might have a negative impact on the domestic bond yields
• Yields are expected to be range bound. The 10 yr- g-sec is expected to trade between 7.15% and 7.25%
• It is a good time to invest in fixed income funds as inflation is lower and real yields are attractive

Funds recommended

• Longer duration funds look lucrative at the current time

Rahul Pal, CIO – Fixed Income, Mahindra Manulife MF

• Commodity prices including crude has increased through the month, which may put pressure on inflation
• The bond index inclusion would prevent any run up in yields
• 10 yr-g-sec is expected to trade in 7% to 7.25% range

Funds recommended

• Short term investors can go for ultra and low duration funds while investors having long term investment horizon can look at dynamic bond funds

Sandeep Agarwal, Head, Fixed Income, Retail Business, Sundaram Mutual Fund

• The continuing of resilient economic activity, tighter jobs market, slowing pace of fall in inflation and rising uncertainty on geo-political front have led to significant downgrade in the expectation on easing of monetary policy by global central banks
• Domestic bonds yields rose by 10-20 bps across the curve due to the global bond yields movement and rising crude prices
• Bonds are expected to remain range bound in the near term with 10yr g-sec in the range of 7.10%-7.30%
• Short end rates can rise in the coming weeks due to tightening of liquidity and reduced government capex

Funds recommended

• Money market fund, low duration fund and ultra-short duration fund are suitable for investors with short term investment horizon while investors with longer term investment horizon can look at short term funds, banking & PSU funds and corporate bond funds