ONCE AGAIN AN INVESTMENT OPPORTUNITY AT LONG END. WHEN? & WHY?
I had written in my note on November 03’2009 post RBI Credit Policy Review of announced on October 27’2009 that there will be positive bias on interest rates for some time as a) Credit offtake numbers were dismal b) incremental buying of G Secs by Private Sector banks due to hike in SLR of 1% & c) huge inflows on account of FDI/FII & huge systemic liquidity.
This call panned out well & benchmark 10 year corrected from a high of 7.45% to a low of 7.15% a couple of weeks back. This was the trading zone I had mentioned in that note.
However, very high food inflation number of 17.50% announced last week & higher than expected IIP/GDP numbers created some flutter in the debt markets. Also, statements by Dy RBI Governor Ms. Usha Thorat & by Mr.Rangarajan of having a relook at the easy monetary policy in light of the rising food inflation & that this inflation is not only supply side issue but also speculative in nature due to ample liquidity in the system has caused some rethink in the minds of the traders. Also, the same is getting reflected in firming up of prices in manufacturing sectors like automobiles, steel, cement,etc which can give rise to higher than expected inflation numbers in the next couple of quarters. Due to all these events of the past few days & statements by RBI & MoF 10 year benchmark has already crossed the psychological barrier of 7.50% & is currently quoting at 7.52%. Also new benchmark of 6.35% 2020 is also quoting above 7.60% levels & rising.
All these is a prelude to the imminent rate hikes & CRR in the forthcoming Credit Policy Review in January 2010. Market has already started discounting these news.
What will be the impact on Short & Long End of the Curve in case of Reverse REPO &/or CRR Hikes?
- Short end of the curve will start inching up. The same has already started happening in as much as 1 year/ 3 yrs CD/Corporate Bond rates have gone up by 40-50 bps over the past few weeks. 1 year CD has gone up from 5.05% to 5.50% & 3 year Corporate Bond has already gone up from 7.25% to 7.65-70%
- Though CRR hike will suck out liquidity; due to large systemic liquidity the same will not vanish in a hurry • On the day of the announcement there might be a sudden spurt at the short end; which can settle down post that to reasonable levels
- Long end of the curve need not be impacted; if at all, it should have positive impact at that end of the curve
- Short term plans will get impacted for a short span. Those schemes which have longer duration will be impacted more than the ones which has high accrual & lower duration ( like Templeton India Short Term Plan. Average maturity of this scheme is less than one year & gross yield is 6.76% inspite of 25% exposure to CD/Cash.This scheme with 25% in Cash/CDs should have great opportunity of investing this portion at higher levels when rate hikes come into effect & short end spikes up )
Once Again an Investment Opportunity at the Long End & Why:
- It is that band of the trading zone ( mentioned in my November 03’2009 note) when one can look to invest at the long end for following additional reasons
- As mentioned above, any rate hikes or CRR hike will have an immediate impact at the short end rather than the long end
- Year end buying by Insurance companies will boost long end rates
- Credit offtake still dismal which was evident when SBI cut their lending & deposit rates & the same was followed by other banks as well a few months back
- Next year Fertiliser & Oil subsidy should be on the lower side
- Hopefully no more fiscal stimulus packages need be announced in the next year which can increase the borrowing programme like in the current year
- If at all, fiscal & monetary stimulus packages might be rolled back gradually, giving rise to higher revenue collections & hence lower borrowing
- State Governments have collected a huge amount of approx.Rs.1 lac crores @8.50% in their small savings schemes; hence they also might have lower borrowing requirements next year
- With rise in GDP, revenue collections for the forthcoming years should improve dramatically
- Also, healthy disinvestment of PSU Equity figures which have been planned going forward alongwith collections from 3G Auction should also help in reducing Fiscal Deficit numbers
- With interest rates at the long end also inching up in anticipation of rate hikes; this can give good opportunities to Fund Managers managing G Sec & Income schemes to lock in higher gross yields in their portfolios. Also, by taking some exposure to good State loans ( quoting 100 bps higher than Central Loans) can also boost overall YTMs of these schemes
- All the above should augur well for Long Term Income/G Sec Schemes with one year investment horizon. Ideal time to invest will be when rate hikes happen & the rates inch up further to 7.75% plus. However, one can stagger their investments even at the current levels & increase their exposure post credit Policy review in January 2010
Comments
Kindly suggest why one should invest in Birla income fund currently repositioned as Dynamic bond fund? What shud be the investment horizon?
Regards
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