Do you expect further rate hikes?
We believe that we are nearing the peak of the interest rate cycle. Now, can there be a couple of more rate hikes? Yes, possible. Our view is probably that the RBI MPC will hike rates for the last time in April. But even when it comes to global markets, we do not anticipate anything where Fed would dramatically go above 5.5% on the Fed funds rate.
Today markets are pricing in a 5.25-5.5% kind of Fed future rates across the entire curve, globally also and probably a large part of Indian bond market is also pricing in a 6.5-6.75% operative rate. Our view is, we are peaking the interest rate cycle at least in this rate hike environment. With growth slowing, we believe that for most part of this year, RBI can be on pause. However, we are nearing the peak of the interest rate cycle with one to 10-year across the entire segment now broadly being at 7.60-7.75 levels.
The one year corporate bond CDE levels are at 7.75%; three year, 10-year corporate bonds all at 7.75%. The GSec curve between three to five years or one to 10 years is between 7.30% and 7.5%. So the curve being flat, and we are not expecting any significant rate cuts this year. We are advising clients to stick to the short end of the curve at this point of time.
If the investment horizon is less than 12 months, park your money in ultra short-term funds. If the investment horizon is more than 12 months and probably looking at a two to three year investment horizon, short to medium term funds make a lot of sense. Yes, for the category of investors who are targeting long-term investments in fixed income markets, long funds also make a lot of sense.
Absolute entry levels above 7.5%, are good to go for investments even those which are longer term in nature. Our advice is first of all start investing in the fixed income segment and depending on the investment horizon, choose the bucket of the mutual fund category.
Should investors consider almost like 10-year maturity in the current market environment?
What we believe and what I have been explaining is probably that broadly, the macro is now trending towards where we are peaking on the interest rate cycle. Even if RBI growth predictions are lower, the best estimate for us is probably next year GDP numbers being closer to 5-5.5% band. If I actually look across inflation also.Our belief is that the inflation will start trending downwards and we will probably have an average inflation for next year closer to 5.5%. With positive real rates, the repo should peak at 6.75%, max 6.5-6.75% and with overall borrowing numbers where we are looking at the fiscal deficit number close to 5.9%. We believe 7.5% levels are good for investors who are looking at longer term investments in fixed income cycles.
Absolute entry levels, the curve being flagged for investors who are looking at longer term investment horizon and with a macro which now we believe that this is a peak of interest rate cycle, I think long bonds make a lot of sense. If we look across the spreads of government bonds versus SDS and corporate bonds, the SDS and corporate bonds spreads are too flat because of lack of supply. Government bonds have been huge supply and hence the spreads realignment have happened.
We prefer the base curve at this point of time and 10-year or longer bonds are generally advised for clients whose investment horizon is beyond five years. We believe that for a certain category of investors, it makes sense to start looking at long bonds at the peak of interest rate cycle.
The Axis Nifty G-Sec September 2032 Debt Index Fund has been launched. Could you explain this to us?
Yeah, it is a 2032 Index Fund and as I explained to you, we believe that at this point of time we are nearing the end of rate hike cycle. Secondly, from an investor perspective, I think absolute entry today, 10-year government bonds are trading at close to 7.5%; on an annualised perspective, they are trading at close to 7.60%. These are good levels for investors who are looking at a longer-term investment solution from fixed income markets.
We have launched a G-Sec Fund. I think the absolute spreads today of corporate bonds and state level of loans, which are generally the other typical investment options available for long term investors are too compressed and hence at this point of time, government bonds index funds makes a lot of sense for that category of investors who are trying to find out a longer term fixed income solution. Probably with interest rate cycle peaking and the inflation trending downward, these funds make a lot of sense for such investors.
What kind of investors should be parking money in this?
These should be investors who have a typical longer term fixed income investment solution and who are targeting more from efficient tax substitutes who are looking for longer term fixed income investment sectors in India. I think this product makes a lot of sense for such a category of investors.
