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    Stay short, stay in corporate bonds: R Sivakumar, Axis Mutual Fund

    Synopsis

    “From 3-6 months’ perspective, our view is that liquidity will come back into the system.”

    R Sivakumar-Axis MFET Now
    "If RBI sends a signal that they are going to use OMOs to support the market to address liquidity, markets will take a lot of heart from that. "
    Talking to ET Now, R Sivakumar, Axis Mutual Fund, says one lakh crores of market stabilisation bills are due for maturity in March. So, actually a surge of liquidity will be coming back into the system from here to end of March.

    Edited excerpts:

    What do you think is causing the hardening of the yields besides high inflationary expectations?
    We have had a perfect storm of negative news for bond markets over the last few months. Of course, the inflation has been the one underpinning that along with the global rise in yields and commodity prices but the driving force really has been the fiscal slippage and the fact that the market is now very uncertain as to how the government is going to complete its market borrowing programme.

    Given the backdrop in which the RBI has been advising banks to reduce their interest rates risk, who is going to buy Rs 10 lakh crore of bond issuance by the centre and states next year and that has really the key reason why markets have been under tremendous pressure. There is both macro inflation worries and concerns about the fisc stance and supply-demand scenario.

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    What according to you or rather how much of the recent yield hardening do you think is led by tighter liquidity conditions? Also liquidity is expected to tighten much more from here onwards up until March. How do you see that impacting the short-term rates and the 10-year yield? Do you think the situation is going to only worsen from here onwards?
    You are right, liquidity has been a contributing factor but on the flip side, we must remember that about one lakh crores of market stabilisation bills are due for maturity in March. So, actually a surge of liquidity will be coming back into the system from here to end of March and then of course the government which is today sitting on a large cash balance with the RBI is also likely to spend in the new financial year.

    When you look at it from 3-6 months’ perspective, our own view is that liquidity will come back into the system. Two factors are probably going to keep liquidity draining out –the ongoing increase in the currency in circulation and the other is that the FIIs have been selling and especially in equities. Therefore, the balance of payments on a monthly basis may see a draw down in reserves which will lead to some liquidity tightening. On balance, we should see liquidity situation improving over the next couple of months and that should provide relief for the money market in short-term bonds. This is not going to directly have a positive impact on long bonds, especially the government securities.

    What is the expectation now from the RBI in terms of liquidity management? You said you are not worried about the flows now but while the RBI did say that they will be using a lot of tools to help manage liquidity, did a lack of OMO announcements disappoint?
    Last year, when there was a surge of build-up in reserves, the RBI sterilised that buildup in reserves through OMO sales of securities. More recently, we have seen reserves drop and RBI may choose to do open market purchases rather than sales. That means they had to buy bonds in the market to infuse some liquidity and that could provide much needed support for the bond markets.

    Last year, we had higher deficit and that the RBI selling long-term bonds into the market certainly pressured the yields in the second half of the financial year up to now. If RBI sends a signal that they are going to use OMOs to support the market to address liquidity, markets will take a lot of heart from that. This is one trigger that we could see from the RBI in the next few weeks.

    What is the sense when it comes to the trajectory of bond yields now, given the kind of move that we have witnessed already? Do you think bond yields have peaked out and what are the factors that you will watch out for from here -- be it on the domestic or even the global front?
    Most of the factors are going to be domestic and from our own perspective, we did not see the blowout to 780 happen and I think bond yields are fairly priced relative to inflation. Inflation is at 5% and your 10-year is close to 8%. This is reasonably priced but the market is more concerned right now about the supply and demand situation and we must remember that in February and March, when there are no central government securities up for auction, we are seeing this kind of pressure.

    So, what happens when the new financial year starts and you get Rs 20,000-30,000 crore per week of G-Sec supply hitting the market? That is what the markets are really worried about. If the RBI were to do something to address the market concerns on this, then there will be value buyers. Close to 8% is really interesting from a buying perspective. We also need to remember that if RBI genuinely cares about the 4% inflation target and achieves it over the next one to two years, then we are talking about 4% real yields on the 10-year which is a fantastic level if you were to look at it from buying perspective.

    What is the advice now that you have fixed income investors? Would you prefer short end or long end of the curve and what is the rationale?
    The short tend is significantly likely to outperform compared to the long end and reasons for this are two-fold – one, while the long end looks fairly valued, I do not see too many triggers for a sharp pull back in yields which will help us make money there.

    At the short end to the curve, clearly the market is worried about RBI rate hikes and tight liquidity. As liquidity comes back, that is the segment where we expect to see yields drop. That is the segment which we really like. Investors are not going to get compensated for higher duration through yields. The yield curve which you see from overnight to five years is reasonably steep but after five years, it is quite flat and that suggests that there is no real benefit to running long duration. So stay short, stay in corporate bonds which are still outperforming relative to government securities. That is how our portfolios are positioned and that is what we would recommend to investors.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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