Bizarre markets, scarred bond yields- Markets await RBI action, Ukraine peace talks for respite- Lakshmi Iyer

Bizarre markets, scarred bond yields: Markets await RBI action, Ukraine peace talks for respite: Lakshmi Iyer

Written By:

Lakshmi Iyer

Global growth prospects could see a mar

On bond yields it already shown a scar

World eagerly awaits opening of the peace jar

Till then markets may continue to behave bizarre

Last month or so has been characterized by turbulences in global financial markets. Gold has been on a roll, while bond yields continue to take a toll. We have seen 10-year US treasury yields go up ~60 bps from 1.90% to 2.50%. Crude oil prices have jumped ~15% since the war broke out. We have seen the US Fed hike rates for the first time in over three years to combat the worst inflation in the US since the 1970’s. The current inflation in the US is ruling way above the annual target of 2%. As recent as December last year, the markets were discounting ~3 rate hikes in CY 2022. Now, we are staring at ~7 rate hikes for this year – sharp U turn in sentiments!

How does India compare here? India is a net importer of crude oil. So it is natural to see a widening of our current account deficit as crude oil prices inch up. Add to it, a depreciating INR aggravates the woes. In the last one month we have seen ~1% depreciation in INR – which is not that drastic. India’s inflation (read CPI) at 6.10% is still not materially away from the CPI target of 4% +/- 2% we have set for ourselves. It is therefore less worrisome that the Indian 10 year Gsec benchmark has moved only ~8 bps from 6.76% to 6.84% in the past 4-5 weeks. One must also note that FY 2022 borrowing program is over (except for state loans) which has helped in putting a lid on rising bond yields

Key to see is what will be the way forward

The answer to this is not very straightforward. RBI’s moves in the upcoming MPC is very pertinent. Will the MPC do a U turn after maintaining a dovish undertone till recently? That would be a key watch area. We also kick start FY 2023 GoI borrowing program April 22 onward. How well the RBI (in the role of merchant banker to GoI) can navigate through this mammoth borrowing program would be a key determinant to the direction of bond yields going forward. Equally important is to see resumption of GSAP (gsec secondary market acquisition program), OT (Operation Twist) etc to anchor bond yields going forward. In isolation, the week-on-week impending supply is likely to put pressure on India govt bonds and we are likely to see bond yields head northward. Small respites due to easing in crude oil prices, easing war scene etc may offer temporary respite to bond prices. Hence, we expect ‘yield carry’ to be a dominant source of returns for fixed income investors this year.

(Lakshmi Iyer is Chief Investment Officer (Debt) & Head Products at Kotak Mahindra Asset Management Company. The views expressed are author’s own)