Global monetary policymakers take a breather, but rate cuts remain distant

Investors with medium to long term investment horizon can look at funds having duration of 3-4 years with predominant sovereign holdings as they offer a better risk reward currently. Investors having an investment horizon of 6-12 months can look at the money market funds as yields are pretty attractive in the 1 year segment of the curve

Experts believe that global monetary tightening has come to a pause though rate cuts are still sometime away. They are of the view that RBI will also be on a long pause with government taking fiscal steps to manage inflation.

Talking to Bizz Buzz, Ajay Manglunia, Managing Director and Head of Investment-Grade Group at JM Financial, said, “I am of the view that the broad range of the benchmark 10 year G-Sec yield will be somewhere between 7.25 per cent and 7.40 per cent over the next couple of months.”

The reason being that there is no rate hike and the liquidity is neutral and the RBI will be on a long pause. It simply means that the existing rates are likely to stay for the long run, he said.

Investors with medium to long term investment horizon can look at funds having duration of 3-4 years with predominant sovereign holdings as they offer a better risk reward currently. Investors having an investment horizon of 6-12 months can look at the money market funds as yields are pretty attractive in the 1 year segment of the curve.

Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund, said, “We think that the broad range of the benchmark 10 year bond yield will be between 7.20 per cent and 7.45 per cent over the next couple of months.”

Given the recent rise in yields which has pushed back the expectations of rate cuts, yields have entered attractive territory and investors can look to increase allocation to fixed income as growth is expected to slow down towards the end of the year, he said.

Bond yields were steady this week as crude oil sold off towards a more than three month low even as the middle-east conflict raged on. Stable global bond yields and lower crude helped Indian bond yields as the benchmark 10 year bond ended the week at 7.30 per cent almost flat from last week’s closing of 7.31 per cent but the real surprise of the week was Indian currency. Rupee closed at its lifetime low against the dollar at 83.34 after touching an intra-week high of 83.50. Though the week over week movement in domestic currency is minor but the all-time low weekly closing is significant given the fall in crude and the continuous intervention in the market by RBI. Within the emerging market and Asian currencies also, rupee is a relative underperformer since the start of this month.

The dollar index which had weakened post the Fed meeting at the start of the month strengthened toward 106 again after some hawkish comments by Fed Chairman Powell. Government announced the extension of the PMGKAY scheme for next five years under which the government supplies 5 kg of food grain free of cost to eligible families.

Though the immediate fiscal cost is likely to be met by higher revenues as net direct tax collections rose 21.8 per cent from last year crossing 58 per cent of the budgeted target, which presents a healthy revenue picture for the government but nonetheless this kind of announcement can give rise to competitive populism ahead of elections. Banking system liquidity remained tight through the week on lack of government spending and FX intervention by RBI as overnight rates tracked the MSF rate of 6.75 per cent.

According to Pal, “we estimate that the government cash balance is running close to Rs 3.5 trillion which is leading to the current liquidity tightness. After a gap of eight months, India’s goods export rose for the first time in October. This is based on preliminary data and if base impact is there, it still shows that demand is not as weak as thought of earlier.”

Another interesting news which came this week was that patents filed by Indian applicants grew by 31.6 per cent in 2022 according to World Intellectual property organisations thereby extending an unbeaten 11 year run of growth unmatched by any other country among the top 10 patent filers.

The overnight Index swap curve (OIS) curve was stable during the week in line with bond yields domestically and globally. The 5-yr OIS was down by 3 bps ending the week at 6.55 per cent and the 1yr OIS was lower by 1 bps ending the week at 6.88 per cent.

The global bond markets were stable while showing a downward bias in yields most of the week before some hawkish comments by the Fed chairman and a weak 30-yr auction led bonds to give up some of their gains. The benchmark US 10-yr bond ended the week at 4.65 per cent up 8 bps on the week.

The US Fed is, in analysts’ view, done with rate hikes and is going to be on a long pause. The lower issuances of longer tenure US bonds as announced by the US treasury last week has led to a downward tick in yields but it may not change the long term challenge of funding a higher fiscal deficit over the coming years, which gives support to the higher for longer narrative. Rating agency Moody’s changed its credit outlook on US to ‘negative’ from stable.

The dollar index strengthened after falling almost 1.50 per cent from its peak. It ended the week at 105.68. Next week, US inflation number is expected at 3.30 per cent, which will be crucial in determining whether the recent soft economic and jobs data is being accompanied by softer inflation also. The university of Michigan Inflation expectations rose to a 12-yr high.

The Reserve Bank of Australia hiked rates as expected while increasing its Inflation forecast. Meanwhile, 2023 is on course to be the warmest year ever recorded.