Market update - Rising yields
Two factors contributed to the 20bps rise in the benchmark yield in October – the cautious tone of RBI’s monetary policy and the potential surge in bond issuances to support the proposed recapitalisation of state-owned banks.
The October Monetary Policy Committee (MPC) meeting suggested a reduction in the probability of a rate cut in December. Firstly, the MPC raised its consumer price inflation projection for the second half of fiscal 2018. It stated that various factors including potential fiscal slippages could pose upside risks to inflation. Second, the RBI also seemed to suggest that the slowdown in GDP growth is transient and hence further rate action will be unnecessary.
Along with bank recapitalisation, the government also announced in late October a huge road sector investment program totaling INR6.3trn (upwards of US$100bn) over the next five years with potential road construction of 16,700 kilometres per year. This is a very positive measure for creating jobs and improving growth.
Unless corporate bond spreads decline sharply, the Fund will continue to sell GOI bonds in the portfolio and purchase corporate bonds to pick up spreads on corporate bonds of around 50 to 70bps on AAA-rated and 120 to 140bps on AA-rated bonds.
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