Debt Market Update

Debt Market Update

Bond yields remained steady as investors were cautious amid lack of fresh economic triggers. Yields fell following an escalation in US treasury prices but the scenario reversed on caution ahead of the weekly auction of government debt ƒ

Benchmark 10 year G-sec yields remained absolutely flat during April 2016 at around 7.45% ƒ

Liquidity continued to be in deficit but improved in April. It is expected to ease further in coming months as the RBI moves to improve the deficit situation. RBI has committed to progressively reduce liquidity deficit in system from 1% of NDTL to 'a position closer to neutrality.' RBI announced various liquidity easing measures including OMOs. Start of the new financial year also helped bring back the year end deficit ƒ

Improving liquidity helped reduce yields on short-term papers across instruments viz. CDs, CPs and the short-term corporate bond market ƒ

The structural improvement in the form of benign inflation and prospects of normal monsoons continue to lead to a positive outlook in the medium-term ƒ

Headline CPI for April 2016 came in much higher-than-expected at 5.39% vs. 4.83% in the previous month as food inflation climbed to 6.32% from 5.19% in the previous month on account of ongoing heat waves and acute water shortages in various parts of the country. In its initial forecast for 2016 south-west monsoon, the Indian Meteorological Department (IMD) predicts high probability of an above-normal monsoon. This will provide a much needed breather to the economy that has witnessed two consecutive years of poor monsoon. However, the actual impact would also depend on the spatial and inter-temporal distribution of monsoons and the sowing pattern.



Outlook

Overall liquidity measures announced are extremely positive for funds at the short to medium term maturity papers. Therefore, bulk of the debt investment should be in good quality short-term debt funds. Ultra short-term debt fund and liquid funds are likely to benefit from the fall in short-term yields ƒ

The Indian Meteorological Department’s (IMD) announcement of expectation of normal monsoons in its first forecast for the season cheered the markets. The IMD has predicted that rains in 2016 would be between 104 and 110% of the long-term average. Better monsoon would improve the inflation prospects and, therefore, would be medium term positive for the debt markets ƒ

Although the outlook on G-Sec yields remains positive, the duration strategy should be played through actively managed income or dynamic bond funds. They will be able to make swift duration change within G-secs or switch between corporate bonds and G-secs within specific duration

Happy investing

Source;Icicidirect.com