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Jul 12, 2012, 08.23 AM IST
Dhawal Dalal, Senior Vice President, Head - Fixed Income at DSP BlackRock Mutual Fund believes that bond yield movements are likely to hinge more on the Reserve Reserve Bank of India’s (RBI) open market operations (OMO).
Dhawal Dalal, Senior Vice President, Head - Fixed Income at DSP BlackRock Mutual Fund believes that bond yield movements are likely to hinge more on the Reserve Reserve Bank of India's (RBI) open market operations (OMO). "We believe that the systemic liquidity is likely to improve in the near-term and if that is the case, then we believe that the RBI will refrain from doing more OMOs in the near-term," Dalal tells CNBC-TV18 in an interview.
However, in the absence of OMOs within the next two-three weeks, Dalal expects bond yields to remain range bound with an upward bias. He also feels that the new 10-year yield will underperform in the near term. According to him, weakness in economic growth will weigh on yields and he sees the spread between new and old 10-year yields narrowing to 20 bps. Besides, Dalal is also hopeful of good returns on gilt funds with a one year view.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: Do you expect bond yields to be this range bound or do you think the July policy might be an important event in determining whether it comes off below 8%?
A: I think at this point of time bond yields are likely to react more on the Reserve Bank of India’s open market operations (OMO) news. We believe that the systemic liquidity is likely to improve in the near-term and if that is the case, then we believe that the RBI will refrain from doing more OMOs in the near-term.
That should keep pressure on the bond yields. There is 75,000 crore worth of bond supply hitting between now and the next credit policy meeting due on July 30. If the RBI refrains from doing more OMO in the near-term in the next two-three weeks then we expect bond yields to remain range bound with an upward bias.
Q: With what kind of upward bias do you think the yield could move between in terms of a range?
A: At this point of time if you look at the new ten year versus the other liquid 9.15% 2024 the spread is about 30 bps. We expect this spread to narrow to about 20 bps or even less in the near-term. So we expect the new ten year to underperform in the near-term.
Q: How soon people expecting the new five year to hit the market and how high is interest on that?
A: I think looking at the market, we expect the new five year to cutoff between 8.05-8.10%. If there is any possibility of dollar denominated bond for the five year tenure going forward and if the RBI decides to issue more new five year in the near-term, then we expect brisk trading and possibility of some gains in the new five year.
Q: From a mutual fund perspective are the fixed maturity plans (FMPs) still okay, for people who bought FMPs maybe a couple of quarters back - one year and two year, would this still be inline to get those more than 10% kind of returns?
A: At this point of time looking at the money market curve, the one year assets are trading around 9.5%. We believe that market participants are exhibiting some sort of a fatigue towards FMP and they are more inclined to look at other avenues to invest their money.
Q: A few months back, most of the fund managers on the fixed income side were advising their clients to add duration on their Gilt products etc. Has that turned out to be a disappointing kind of an investment because so far you would not have seen great returns from Gilt funds because interest rates have not come down to the extent imagined?
A: It's too early to predict whether that call has gone wrong or not just because the RBI has refrained from cutting rates in the last credit policy meeting. We still believe that looking at the economic growth, which is weakening, we expect the bond yields to remain range bound over near-term and ultimately come down. So if the investor decides to remain invested, I am expecting a good return from investors' investment over one year period.
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