Global and Indian debt markets performed strongly in December due to the US-China trade war and continued US Federal Reserve interest hikes.
Debt markets shine in a murkier global growth outlook:
- Global equity markets were extremely volatile, led by increasing growth anxieties surrounding US-China trade tensions, a growth scare driven decline in crude prices, and dovish statements by the Fed. The outcome of these events was a 28-bps drop in 10-year US Treasuries in December.
- India was not immune to the global uncertainty as growth challenges emerged due to weak demand for consumer durables, unexpectedly weak performance by the Bharatiya Janata Party (BJP) in state elections in Chattisgarh, Madhya Pradesh and Rajasthan as well as a new RBI governor following the abrupt resignation of Dr Urjit Patel.
- The biggest driver for Indian debt markets was the steep fall in crude prices (dated Brent was down 8.4% for the month, and down 38.3% for the quarter), significant softening in consumer price inflation, and strong liquidity support by via the RBI’s open market operations in government securities. Headwinds were fiscal management as ongoing softness in GST collections was exacerbated by cuts in GST rates on select items, the government’s commitment to a large recapitalization program for state-owned banks and increasing pressure to tactically follow populist policies ahead of general elections. Tailwinds prevailed, and G-secs rallied for a third consecutive month with the yield on 10-year G-secs was down 24 bps for the month and down 65 bps for the quarter.
- Corporate bond markets were relatively flat as credit spreads remained tight, despite being at the higher end of their historic range on lingering effects of the IL&FS default and a larger borrowing program from the state governments in last quarter of this fiscal year.
- The Indian rupee benefitted from the sharp fall in crude prices and relief from cross currency trends (dollar spot index DXY was down 1.13% and JP Morgan Emerging Market Currency Index was down -0.42%). The rupee fell a modest 0.17% in December following its extraordinary 6.10% November gain.
- Foreign portfolio flows have returned after peaking of crude prices and mean reversion in currency. December saw net buying worth US$671m from FPIs.
On a point-to-point basis, the benchmark 10-year yield on government bonds fell by 24bps from 7.61% to 7.37%. Conversely, the spread on 10-year AAA and AA corporate bonds widened by 19 bps from 98 bps to 117bps and by 24 bps from 155 bps to 179bps respectively. This resulted in gains in NAV at 0.92% in rupee terms.
A 0.17% Indian rupee depreciation versus the US dollar capped the NAV gain of US dollar 0.75%. Year to date, the Fund’s NAV is +4.02% in INR terms and - 4.90% in US dollar terms, when adjusted for the 8.58% Indian rupee depreciation. The cash level in the Fund has gone up to 11.1% on the redemption of bonds by IDFC Bank and Indian Railways Finance Corporation (3.4% of the fund AUM each).
The Fund Managers are constructive on debt markets in 2019;