Money Market yields of up to 1 yr look attractive

Weekly View on Fixed Income markets by Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.

Given the current liquidity tightness and continued FX intervention by RBI, we expect incremental OMOs by RBI to the extent of INR 1.5-2.00 trn in the next few months. The supply demand dynamics remain unfavourable and we expect the curve to remain steep.

Investors can continue to allocate to Corporate Bond Funds having portfolio maturity up to 5yrs while being tactical in their allocation to duration through Dynamic Bond Funds. Investors should have a minimum investment horizon of 12-18 months while investing. Money market yields of up to 1yr are also looking attractive relatively from a risk-reward perspective. Investors with short term investing horizon can look to allocate in this segment also. We expect a long pause on policy rates and expect the 10yr benchmark bond yield to trade in a range of 6.45% to 6.75% over the course of the next few months.

Indian Markets:

The yield curve continued to steepen in the first fortnight of February as markets reacted negatively to the higher than expected gross borrowing for FY27. The yields at the longer end of the yield curve (30 to 40 yr maturity segment ) are higher by 5-7 bps whereas yields at the shorter end of the curve (up to 5yrs ) are lower by 5 bps. The benchmark 10yr bond yield was flat. The yields have come off from their highs as RBI refrained from absorbing the excess liquidity in the banking system, leading to a sharp drop in the overnight lending rates (TREPS), which has been trading below the SDF rate of 5% over the last fortnight. RBI had also conducted 90 day variable rate repo towards the end of last month and this signalled RBI's discomfort with rising yields, especially at the shorter end of the yield curve. This has supported the markets, especially the short term money market curve, which has seen yields coming off by 20-30 bps from their highs.

Earlier at the start of the month, yields had risen on back of the higher than expected gross borrowing numbers and with no explicit liquidity infusion measures in the MPC policy. The 10yr bond yield touched a high of 6.76% before value buying emerged. Government of India also conducted a switch auction of FY27 maturity securities with RBI for an amount of INR 75,000 crore, which helped in improving the sentiments in the bond markets, leading yields lower. The switch will lower the gross borrowing number for FY27 to INR 16.5 trn from INR 17.2 trn. The first print of the new CPI series was released and it came at 2.75%, in line with street estimates and the "Core "inflation came in at 3.40% sharply lower than the "Core" inflation of the old series. Certain items in the new series are indicated at lower levels compared to the old series and it is prudent to wait for a few more prints in the new series before assuming any trend changes. In contrast to the "core inflation", food inflation seems to be higher in new series. Following the finalisation of the broad trade agreement with US, INR rebounded and has appreciated by about 1.40% this month so far, trading at 90.64. FPI inflows continued to be positive in debt standing at USD 550 mn. RBI also announced relaxation in Voluntary Retention Schemes (VRR) route for FPIs and this is also expected to lead to more FPI flows in future.

International Markets

US Bond yields retraced from their highs with the benchmark 10yr Bond yield trading at 4.05%, down 18 bps from the start of the month.

Source : Equity Bulls

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