Markets to remain range-bound: Mahendra Jajoo

 

There was major action last week in international markets and the rupee, overshadowing the bond markets which have been in a strong bull run over the past couple of months. Firstly, global attention was on the Federal Reserve chairman's speech searching for any clue on any possible roll-back in its bond buying programme. And the Fed did not disappoint in creating fresh doubts in traders’ minds. In a double-worded response to question on the issues, the Fed indicated that while the bond buying programme is set to continue, partial or a full roll back could be triggered in next two-three meetings, if the incoming data suggests an improvement in economic environment and the labour market.
 
That in our assessment, is one way of preparing the markets for a likely slowdown in the bond buying programme, as this response is quite different to the same question on previous few occasions. Secondly, the rupee took a big hit touching the 56-mark in spite of strong FII flows. That nullifies to some extent the positive impact of the improved macro factors like softer commodity prices and reduced subsidies. This also falls in line with our expectations of a consolidation at current levels.
Turning to fixed income markets, bond markets though still buoyant showed some signs of consolidation. Even though new benchmark 10- year yield eased by almost 10 bps to 7.06% on intra- week basis in thin isolated trades, broader markets remained range bound with lot of volatility. The Reserve Bank of India (RBI) stayed away from any open market operations for the third straight week sobering sentiment somewhat.

Previous benchmark 8.15%2022 bond remained in 8.42-8.32% band. All corrections were handsomely bought and all rallies were equally well sold off. Spread products like SDL and corporate bonds widened by 5-10 bps. Given the rupee slide and rumours that RBI is buying dollars, money market rates inched up on expectations of resultant tight liquidity.

Next week is a data light week. Among the more important ones would be the April fiscal deficit, which could cheer the market up slightly. Otherwise, markets are expected to be range-bound. While traders certainly expected more rate cuts in coming months, that also is priced in at current levels.

Technicals suggest the next target at 6.93% which will keep the bonds well bid, however profit booking is also likely at higher levels. All attention would be on OMO and rupee movement. A stable rupee and an OMO can potentially trigger the 10Y to below 7% mark or else yields could consolidate at slightly higher levels if some fatigue sets in. Overall, fixed income markets are still constructive and correction will present another opportunity to buy. To remain invested is still the appropriate strategy currently.
 
Mahendra Jajoo is Executive Director and CIO-fixed income at Pramerica Asset Managers