November saw a sharp rebound as key headwinds suddenly became tailwinds:
The juxtaposition of headwinds was further supported by:
A key outcome
The confluence of events in November sparked a return of foreign portfolio investors, with net buy trades worth US$780 million and US$180 million in debt and equity markets respectively.
On a point-to-point basis, the benchmark 5-year yield on government bonds fell by 36bps from 7.83% to 7.47%. Conversely, the spread on 5-year AAA and AA corporate bonds widened by 12 bps (86 bps to 98bps) and 22 bps (148 bps to 170bps) respectively. This capped the gains in NAV at 0.89% in Indian rupee terms. A 6.10% Indian rupee appreciation versus the US dollar yielded a solid NAV gain of 7.04% in US dollar terms. Year-to-date, the Fund’s NAV is 3.07% in Indian rupee terms and -5.61% in US dollar term when adjusted for the 8.42% Indian rupee depreciation.
Some volatility is necessary and aids performance, extreme volatility does not. Summarizing thoughts on factors that drove relative under-performance of the Fund in November; the yield curve on G-secs was inverted for maturity between 5-10 years for the past three months. This backdrop and macro headwinds precluded the Fund Managers from extending portfolio duration. The strategy was apt as the yield curve returned to positive territory in November with higher absolute basis points softening in 3-5 years G-Secs (36 bps). Unfortunately, the overall curve dropped too suddenly and too sharply; 10-year yield dropped down 25 bps, resulting in a larger price appreciation in longer maturity G-secs. The Fund Managers continue to monitor the yield curve closely for meaningful opportunities.
The Fund is aggressively positioned with higher exposure to corporate bonds (60% of AUM). At the start of the month, the spread on 5-year AAA and AA bonds at 86 bps and 148 bps respectively was at the higher end of long-term range of 50-150 bps and 100-180 bps respectively. Despite a strong liquidity injection by the RBI and a strong growth outlook, spreads widened further in November to 98 bps and 170 bps respectively. The Fund is continuing its credit research, and believes it is appropriate to further increase this exposure when it finds opportunities.
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