Debt Market: August 2017

Debt Markets Fund Manager Commentary August 2017 Fixed Income Market Update: August 2017 Key Market Highlights: • During the month we saw divergence in movement of yields across various asset classes. While short term CD, T bill and corporate bond yields fell on ample banking system liquidity, gilt yields rose on supply concerns and continued OMO sales .

• During the month the ten year gilt benchmark closed at 6.52%, 6 bps higher from previous month. The ten year AAA Corporate bond benchmark closed at 7.45%, 1 bps lower than previous month. The five year AAA corporate bond benchmark closed at 7.22%, 5 bps lower as compared to previous month. Ten year SDL spreads fell and are trading around 67-75 bps to the new gilt benchmark.
• 1 year CD rates closed at 6.47%, 9 bps lower than previous month. 1 year T bill yield closed at similar levels at 6.24%. 3 month CD rates closed at 6.15% and 3 month T bill yields fell to 6.08%, 4 bps lower than previous month.
• Brent Crude oil prices remained stable around USD 52 per barrel. INR appreciated and closed the month at 63.90 as compared to 64.18 the previous month. For the month of August, FIIs were net buyers in the debt market to the tune of Rs 12,965 cr. The Corporate bond and government bond (all categories) FPI limit is almost 100% utilized. India’s July trade deficit printed at USD 11.4 bn as compared to USD 13 bn in June 2017.
• The ten year benchmark US treasury yield fell by 17 bps to 2.11 from 2.29% on a host of factors including safe haven buying due to North Korea issues and uncertainty on the tax agenda of President Trump.
• July WPI data release came at 1.88% as compared to 0.9% in previous month. CPI for July came at 2.36% compared to 1.46% in previous month.
• June Industrial production (IIP) growth came at -0.1% compared to 2.8% for previous month.
• Banking system liquidity remained well in surplus mode. RBI conducted Rs. 20,000 crore worth of OMOs of dated g-secs. Banks lent on an average Rs 2.65 Lakh Cr at various RBI liquidity facilities put together.
• RBI has transferred Rs 30,659 crore as Annual divided to the government for FY 2017 as compared to Rs 65,876 crore paid in previous year. RBI also confirmed in its Annual Report that 99% of the demonetized notes are back in the banking system.
• The GDP and GVA growth for April to June 2017 quarter were at 5.7% and 5.6% & respectively much lower than market estimates. Lower government spending and tepid industrial growth were the main reasons. Fixed income market outlook:
• The US Federal Reserve is scheduled to start unwinding its QE (Quantitative Easing) programme. This may put upward pressure on US treasury Yields. • We expect banking system liquidity to remain in surplus zone and the quantum of surplus is expected to be lower than previous month and in a range of Rs 1.75 Lakh to 2 Lakh Cr. There could be further OMO issuances to suck our durable liquidity.
• Short term Money market rates are expected to remain stable on back of low CD issuance and surplus banking system liquidity. Short term corporate bond yields to remain stable to lower on back on attractive carry and defensive bet.
• The ten yr benchmark may trade in a range of 6.40% to 6.55% in the near term.

*Source: Principle Mutual Fund

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