Debt markets Going Ahead
Mixed signals from various quarters of RBI is sending the sentiments on low or on a high for the past few days. Statement by RBI governor on raising policy rates ahead of other Central Banks created negative sentiments pushing the benchmark yields close to 7.50% & on the next day a statement by one of the Dy RBI Guv saying that they are examining possibility of increasing the limits of HTM category from the present 25% pushed the yields down to 7.20% levels. Most of the bankers have been requesting RBI to increase this limit as time & again their excess holdings in SLR is creating huge MTM losses on their Balance Sheet.
Yesterday though the benchmark yields dropped to close to 7.20% levels, Nationalised banks were net sellers in G Sec market to the tune of Rs.1300 crs & foreign banks & MFs were net buyers. This shows the shift of securities from investors to traders (with the hope that they will be able to sell these off further).
So far with supply concerns, benchmark was hovering around 7.50% levels for some time, with the added pressure of inflation worries, the same can breach 7.50% levels soon. Although as was seen in the past few times when 10 year touched 7.50% levels, it has retraced back from there; thereby showing good resistance at that level. Hence, if one wants to take a trading call, one can take it around these levels.
Also, time again it has been seen (due to oversold position in the debt markets) debt market participants are waiting for any positive cue to take positions. Like for example when auction figure goes down from say Rs.12000 crs to Rs.11000 crs, market is taking positive cue; when RBI made a statement of considering increasing the HTM limits, when auction yield cut offs were better than expected, markets reacted positively. This shows that a) market is sitting light b) expecting lower credit growth c) expecting liquidity to remain good with cautious approach by expecting hawkish stand of RBI to start, inflation worries to determine next direction from RBI.
Market will also take a cue from how long the borrowing calendar will be stretched for the second half. If the borrowing will be spread till March, markets will take positive cue; however if RBI decides to complete their balance borrowing programme by say January 2010, then once again pressure will come on the long end of the curve. Also, almost Rs.1 lac cr of pending State Govt borrowing & its timing will decide the movement at the longer end.
Hence, it can be seen that it is rising interest rate bias with technical rallies happening intermittently. It should give great opportunities to Fund Managers to trade in these bands of 7.20% to 7.50% levels. Ideally suited schemes in this scenarios are: 1) Fortis Flexi Debt, 2) Canara Robeco Income Scheme, 3) Canara Robeco Dynamic Bond Scheme, 4) ICICI Pru Income Opportunities Scheme, 5) Kotak GILT Scheme. All these schemes can take active trading calls & duration calls & generate alpha in investor portfolios.
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