Fixed-income investors should consider short and medium-term investment- grade bonds: Emkay Wealth Management
Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services has released a note on the fixed-income market. The note advises fixed income investors to consider short and medium-term investment grade bonds with yields above 8% in the current market environment. Additionally, there are longer-duration credit products offered by mutual funds and non-mutual fund entities, providing higher effective returns over the life of the products. However, any exposure to such products should be carefully chosen based on the track record of the managers of the products as also the periodic cash flows expected from the investment.
The market has remained range-bound with no major movements either way in market yields. The recent improvement in system liquidity conditions and stable yields in the market has been influenced by factors such as the withdrawal of Rs 2000 notes, net inflows from overseas markets, and the RBI's pause in the rate hike cycle. Nevertheless, challenges remain, particularly in managing inflation expectations and the exchange rate. As a result, yields have stabilized in a broad range, with overnight rates ranging between 6.30-6.50% and one to three months money market rates hovering around 7-7.15%.
The Reserve Bank of India (RBI) has kept the repo rate on hold for the second time this year. This may continue for a longer period if certain factors do not disrupt the equilibrium. The two critical factors that may influence the central bank's decision are the trajectory of retail inflation and the Dollar-Rupee exchange rate. Although inflation expectations are moderating, rising oil prices and essential commodities present a challenge. The RBI considers these factors important, if high prices persist, a policy reconsideration might be warranted
The domestic market has shown movements mirroring overseas markets, particularly in bond yields. The long-end bond yields are likely to continue responding to overseas market trends until the interest policy aligns more closely with the optimal growth-inflation trade-off. The Federal Reserve's aggressive stance toward controlling inflation has led to expectations of further hikes, prompting a bond market rally upon the final rate hike. These movements are expected to continue until there is greater certainty about future price levels and policy decisions.
Approximately one-third of the government borrowing program has been completed. To ensure the remaining half-year borrowing and the overall annual borrowing process do not impact money market rates adversely, liquidity enhancement measures will be required for relatively large issuances. An encouraging factor is an increase in tax collections, which, if sustained, may reduce the need to borrow more than budgeted by year-end.
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