Baroda Pioneer MF’s debt head Alok Sahoo expects 10-year govt bond to trade in 7.75-8.00% range 

The 10-year government bond yield is expected to trade in the range of  ~7.75-8 percent during the first half of FY19, and in the range of ~8-8.25 percent during H2 of FY19, said Alok Sahoo, head-fixed income, Baroda Pioneer Mutual Fund.

In an interview with Moneycontrol, Sahoo said higher open market operations (OMO) purchase by RBI is likely to soften the bond yield.

Currently, the 10-year government bond is trading at 7.79 percent yield.

However, he cautioned that below average monsoons, slippages in fiscal deficit, spike in crude and commodity prices and higher than expected hike in interest rate by US Fed are key risks for the bond yields.

Sahoo envisages gradual FPI outflows from Indian debt market until rupee stabilises, and expects Indian unit to stabilide around Rs 68.5-69 a dollar.

Excerpts:

Rupee is hovering around 68.04 levels and now we are seeing slightly harder macros, on both dollar index and US bonds. How worse can it get before it becomes profitable to sell the dollar, is it 68.50, is it 68.25?Currently rupee is depreciating because of higher crude price, higher CAD, strong dollar and deteriorating macro-economic indicators. Rupee has depreciated by 5 percent since first week of April. We believe that rupee may stabilize around 68.5-69.

Would 68.50 look psychologically good enough or can it go to 69 which would be a new low for the rupee?
If crude price goes up with strong dollar then we may witness rupee touching 69.

Normally when US yields harden they impact the overseas flows into emerging markets, you think this time there could be a big impact on the Indian debt market?
As the US yields are hardening due to hike in rates by the FED , we are witnessing gradual FPI outflows from the emerging debt market. In last two months, more than US $2bn outflows have already happened from Indian debt market. As the rupee depreciation is sharp due to increase in current account deficit so the FPI outflows from the debt market are on the higher side. We expect gradual FPI outflows from Indian debt market to happen until rupee stabilises. However, FPI flows to debt market may turn positive over longer term period as the yields are attractive and macro fundamental are still good.

Where do you see 10-year bond trading? How much more upside can we see in bond yields?
We may see the 10-year G-sec rates to trade in a range of (~7.75%-8%) during H1of FY19 and in the range of (~8%-8.25%) during H2 of FY19. Higher OMO purchase by RBI may soften the yield. The key risks are below average monsoons, slippages in fiscal deficit, spike in crude and commodity prices and higher than expected hike in interest rate by US FED.

Your take on FII investment limit guidelines by RBI
We think the guidelines are there to reduce volatility of flows and bring in long term FPI inflows to the debt market. However, RBI is active in changing the guidelines as and when the situation demands.

How do you think FII investment guidelines will impact the liquidity in the debt market?
The guidelines may increase the depth and liquidity of the Indian debt market.

How do you see the demand for corporate bonds, CPs and CDs?
Recently, the demand for corporate bonds, CPs and CDs have reduced due to lower inflows to Mutual funds, volatile interest rate scenario and selling by FPIs. However, we think the demand may improve once the rates stabilizes and liquidity situation improves.

Where do you see short term rates of money market instruments in the near term?
The ultra-short term rates have hardened by over 100bps in last month, which is unprecedented in the month of May. We believe the rates in pricing is the risks arising out of higher inflation and hawkish stance by RBI. The rates to trade in range bound in near term due to increased supply of money market papers. However, the short-term rates may soften in July due to better system liquidity and lower supply of money market papers.

Crude oil prices have been inching higher towards? What is your assessment?
Crude oil is going up recently due to supply disruption. US backing out of Iran nuclear deal and production curb by the OPEC nation putting the oil market on the edge. Rise in oil price impacts the most to India as we import more than 75 percent of our crude requirement. With rise in crude price, our current account deficit will rise putting pressure on rupee depreciation. The fiscal deficit may rise with government thinking of reducing the excise duty on diesel and petrol. Inflation could also harden with rise in petroleum product prices and rupee depreciation. Our macroeconomic fundamentals could deteriorate with rise in crude price.

What is your take on liquidity in the system and what are your expectations from the RBI policy?
We can expect, System Liquidity to stay closer to neutrality as stated by RBI. RBI should do more OMO purchase to infuse durable liquidity to the system. The system liquidity may be slightly negative i.e.  negative by 20 to 25 thousand crore as RBI will turn hawkish due to higher inflation.

What is the strategy in your funds?
In our funds, we are making investment in short term papers. We believe that the short-term rates are already pricing in more than two rate hikes by RBI. On the risk return basis, the short term papers are attractively valued at this point of time.

Any new launches from Baroda Pioneer AMC?We have launched Baroda Pioneer Ultra Short Duration Fund, an open ended debt scheme that focuses on investing in a combination of  short term debt instruments including treasury bills, certificate of deposits, commercial papers and corporate bonds such that the Macaulay duration of the portfolio is between 3 months and 6 months. We may see range bound markets with an upward bias, and short duration funds will become increasingly relevant in such market scenarios.

As the product is new so the portfolio would be constructed in this interest rate scenario with an endeavor to provide reasonable income with lower levels of volatility.