Axis MF: Fixed income outlook October 2024

SUMMARY OF MACRO EVENTS IN SEPTEMBER 2024

The month of September was eventful for debt markets, with the Fed setting the rate cycle in motion with a 50 bps cut.

It's not only the US Fed; interestingly this quarter imminent global central banks implemented a total of 28 rate cuts, the most since COVID times.

Fed dot plot further gives guidance of additional 50 bps rate cut till December 2024.

A 50 bps rate cut inline with CPI data for the US led to a rally in US bond yields, which were lower by 10-15 bps M-o-M.

Fed futures continue to price in another 50-75 bps cut till December 2024, and we believe that Fed would follow macro data and can deliver another 50 bps cut till December 2024. As US bond yields are pricing in near term cuts we expect them to trade in a range of 3.5% to 3.90%.

Another major event for the month that has been in news is that China will issue $284 billion of sovereign debt to help revive economy half of which will be in form of free handouts to stimulate consumption. This is in addition to surprise rate cuts and cuts in reserve requirements announced by the central bank.

Though the measures announced are of significant magnitude (~25% of annual China GDP), it’s too early to conclude their execution and impact on global macros, inflation, and commodities.

Back home last month, CPI data again was lower on account of base effects at 3.6%. Sept CPI could be higher ~5% due to an uptick in vegetable prices. But Q2 inflation as highlighted last month, would be lower than RBI expectations.

Banking liquidity post Q2 Advance tax outflows got into the deficit zone, but durable liquidity continues to remain hugely surplus @~INR 4.5 trillion, most of which is with the government in the form of high balances.

Indian government bond yields rallied by 8-10 bps due to a fall in global bond yields and increased probabilities of RBI changing its policy stance in October policy.

Due to higher than expected rate cut by FED, a good monsoon, lower headline inflation in Q2 and change in MPC members, we believe that from October onwards, the RBI can change its monetary policy stance. We continue to expect 50 bps of rate cuts till March 2025.

STRATEGY FOR THE PORTFOLIOS AND OUTLOOK FOR MARKETS

1. We have been maintaining a higher duration across all our funds and guiding the rally in bonds since March 2024.


2. Though we have already witnessed a more than 40 bps of rally in yields since the beginning of the year, positive demand-supply dynamics for government bonds and expected rate cuts will continue to keep bond markets happy, and we can expect another 15-25 bps of rally in the next 3–6 months.


3. We believe that the best of banking liquidity is behind us, and once the festive season starts, banking liquidity would continue to be in the deficit zone, and we might see some volatility in money market yields due to a pick-up in credit growth and a higher deposit supply.


4. Hence our portfolios continue to have a higher bias towards government bonds, and we have started to add 1 to 2-year AAA bonds from a carry perspective as Corp bond curve has got inverted where currently 1 year is trading at 7.75% and 5 year is trading at 7.25%.


5. As India's growth remains strong, we don’t expect RBI to be aggressive in cutting rates.


6. We expect 50 bps of rate cuts till March 2025.

RISKS TO VIEW

We see 2 big risks to our long duration view.

• Recent measures taken by the Chinese government as they can break the disinflation cycle and can lead to high commodity prices, which in turn can impact INR and bond yields.


• Fed delivering lower than anticipated rate cuts in 2025 would lead to significant shallow bond market rally in India.

WHAT SHOULD INVESTORS DO?

Investors should continue to hold duration across their portfolios.

Incremental gains in long bonds would be with policy stance change or rate cuts.

In line with our core macro view, we continue to advise short- to medium-term funds with tactical allocation of gilt funds to our clients.

DISCLAIMER

Data as on 30^th September 2024

Source: RBI, Bloomberg, Axis MF Research

Past performance may or may not be sustained in the future.

Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s).

The above strategies are based on current market views of the Fund Manager and ma change depending on the market conditions. Axis AMC is not offering any investment advice/ recommendations.

This document represents the views of Axis Asset Management Co. Ltd. and mustnot be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.