ONCE AGAIN TIME TO RELOOK AT AXIS SHORT TERM FUND
As expected, 3G money outflow has resulted into a deficit in system liquidity (+42000cr surplus for week ended 21st May to -59990cr deficit for week ended 11th June). As a result, short term rates have reacted upwards – overnight MIBOR at 5.35% (3.80% in May), 3m CD at 6.15% and long rates as follows:
| AAA Bond | 19th Apr (Before RBI Policy) | 12th May | 14th June |
| 1Y | 6.6 | 6.23 | 6.75 |
| 1.5Y | 6.75 | 6.6 | 6.9 |
| 2 Y | 7.2 | 6.93 | 7.25 |
| 3 Y | 7.68 | 7.3 | 7.45 |
While advance tax outflows (approx 30-35k cr) seem to have been priced in current liquidity calculations, BWA auction outflow of approx 39k cr will happen by 21st June and is likely to put further pressure on liquidity. One more negative is just announced WPI inflation of 10.16% for May against expectations of 9.6% with extremely hawkish revisions (11%) for the previous month. Street is still divided over whether this will lead RBI to tighten in a more aggressive manner than spelt out earlier (“baby steps”) when global outlook is still uncertain and central banks there clearly in no hurry to withdraw accommodation.
Even after reacting upwards, current levels have maintained steepness. As RBI is prepared to provide system liquidity at 5.25 (by temporarily cutting SLR), 3m onwards curve starting from 6.25 provides enough cushion. And as system liquidity eases by government spending (approx 10k cr/week) and Gsec maturities (51k cr by 28 Jul), rates will slowly drift towards lower band of corridor – 3.75%. Even if we assume that RBI will hike by 50-100bps by December (50bps as per “baby steps” and 100 bps in aggressive stance), current levels provide good opportunities of roll down (6m-1y spread at 50bps) and capital gains. AXIS STP (ASTF) has maintained the duration of 1.15 years (range: 1-3Y) during the current liquidity tightness. They plan to increase it gradually in coming days to play out the steepness for a period of next 6-9 months.
| ASTF characteristics are as follows: | |
| Mod duration: | 1.15 years |
| Gross Yield: | 6.50% |
| Credit quality: | 100% AAA |
| Portfolio Composition as on 14th June: | |
| CDs | 74% |
| Bonds | 25% |
| Cash | 1% |
As mentioned in my earlier notes, this is the right time to capture short term rates in your portfolio through aggressive allocations to schemes like ASTF with at least 6 month investment horizon from the point of view of roll down effect that it will have as well, higher accruals without undue increase in portfolio duration & compression effect & subsequent capital gains that it will bring in post July once Govt starts spending alongwith G Sec redemptions that will take place in July.
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