Resilience shown by economies surprised market: Nippon India MF's Tripathi

We can derive comfort from the fact that the real rates, across economies, are now mostly positive: Tripathi

The three- to five-year duration of the yield curve is attractive right now, says Amit Tripathi, chief investment officer (CIO) — fixed income investments, Nippon India Mutual Fund. In an interview with Abhishek Kumar and Anjali Kumari, Tripathi says investors with 12–24-month horizon can look to be overweight on short-term bond funds, corporate bond funds and banking and public sector undertaking (PSU) bond funds. Edited excerpts:

What is the debt market looking like right now?

The market is stuck in a range and is likely to remain so until a meaningful demand slowdown crystallises. We can derive comfort from the fact that the real rates, across economies, are now mostly positive. Moreover, even as rate hikes continue, inflation has come down in the last 12 months. Considering these factors, the markets can continue to run a constructive view on rates and stick to their rate positions. One thing that surprised the market to some extent is the resilience shown by local and global economies during the rate-hike phase.

Rate cut expectation is building around February 2024. How likely does it seem?

Two months back, the market was expecting the first rate cut in the US to happen as early as July-September this year. India was expected to follow suit. Things have changed since then, and as of now, it’s difficult to say when it would actually happen, given that India is headed for an election next year. It would be safe to say that rate cuts will begin in the first half of next year. It will depend largely on how the macro moves from here on.

Which segment of the market is most attractive right now?

We like the three- to five- year duration of the yield curve, given the flatness of the curve and underperformance in the segment during the last 12-18 months. Moreover, the drivers for this segment to perform well in the next 12-18 months are getting crystallised. The first being the limited rate cut cycle that’s expected to play out in the next 12-18 months. The second driver is the improvement in core liquidity conditions, which will help steepen the curve.

Which fund should investors go for?

From a 12- to 24-month investment perspective, investors should be overweight on intermediate-duration products like the short-term bond fund, corporate bond fund and banking and PSU bond funds. If investors have a slightly longer horizon and adequate risk appetite, they can go for some allocation to longer-duration products as well. A 70-30 model (70 per cent in moderate-duration funds and the rest in longer-duration products) would be the right fit.

There has been some widening in spreads between AAA and lower-rated papers. Will this continue?

I don’t see a reason why this should happen as most corporate balance sheets across the spectrum have seen significant improvements. There can be multiple triggers behind the widening in spreads. One of them is if more sub-AAA private issuers start putting back some leverage into their balance sheets and the supply in this segment increases. Second could be positioning and regulatory reasons, because of which the demand is always skewed in favour of AAA papers. Also, the absolute carry advantage that these papers offered in the erstwhile low-interest regime is no longer a driver for demand. This is because most AAA issues are available in a range of 7.5 per cent to 8 per cent.