Fixed income at reasonable valuations: Mahendra Jajoo

With global markets stabilising and market having corrected, it is now time to buy on dips

 

Last week turned out to be extremely volatile for debt markets with benchmark yields shooting up to close to year high in early part of the week before settling down largely unchanged. Driven by strong demand from FII and oil companies, the rupee which seemed like settling down well within the 60-mark in last few sessions, suddenly jumped past in the blink of an eye in the middle of the week. That supposedly triggered stop losses tossing the currency to 60.70 in an hours trading thereafter. Unnerved by this, traders sold off bonds with old benchmarks 10-year bonds hitting a high of 7.82% where they last traded in January. However, the rupee recovered quickly back to 59.50 by the end of the week bringing some stability in bond markets. Bargain hunting by banks and mutual funds insured that government bonds largely closed the week only marginally down. Corporate bond yields closed marginally higher by 3-5 bps. As liquidity remained stable and RBI largely stayed away, money market rates closed sharply lower with 1-year certificate of deposit rates closing 15 bps lower at 8.15 and 3-month CD rates closing lower by 25 bps at 7.85%.

Global markets have begun to stabilise with US equity and bond markets recovering partially. Bond yields across emerging markets eased during the week with currencies showing some resilience. US GDP growth for previous quarter came in at 1.8%, much lower than expectation of about 2.5%. Fed officials also indicated that markets may have overreacted to tapering and that any slowdown would be dependent on incoming data. Markets which were already in oversold zone naturally welcomed all the news and recovered somewhat.

The correction in bond markets last week did exhibit some signs of capitulation looking at sharp up-move in yields with good volumes. Underlying fundamentals for Indian fixed income markets remain strong. The government took another step in fiscal consolidation by revising the gas prices. With inflation expected to continue to ease and monsoon progress satisfactory, last week’s corrections makes the valuations reasonable. Market outlook in this column in the past few weeks has been that of a cautious stance. However, with global markets stabilising and market having corrected, the stance should now turn to buying on dips. The rupee may still remain volatile and analysts now expect it to hit 62 mark soon. That will keep the market volatile and continue to provide more opportunity for bargain hunting.

Mahendra Jajoo is executive director & CIO- fixed income at Pramerica Asset Managers