Contradictory forces in play and cues mixed:
US 10Y bond yield is nicely in back-and-forth mode at set NT focus zone of 2.15/2.20-2.35/2.40% in the absence of clarity on the way forward; hence, valuation at either-end is seen as stretched. The consolidation phase is also from change in outlook from shift of rate-hike expectation from 2nd half of 2015 to 1st half of 2016. Given this outlook, time-decay will exert upward pressure on yield over 2.40% into 2.65% and it would not be prudent to stay invested at lower end of set focus range. Given the reasonable comfort on favourable trending in growth pick-up, unemployment and consumer-spend, start of rate-hike cycle in 2015 is not completely ruled out. US bonds will stay under pressure if investors risk-on mode stay extended tracking bullish momentum on equity asset. All taken, there are not enough cues at this stage to trigger break-out of 2.15-2.40% focus zone; short term break-out bias is for weakness into 2.50-2.65% if US economic data print turns in favour and ECB/BOJ stay paused in QE.
India 10Y bond is in extended party mode for bullish ride beyond 8.0% into 7.90-7.95%. The trigger factors are many; lower Crude oil price, guidance for rate cut before end of FY15 and credit risk aversion leading to diversion of surplus monies into low risk - low reward Gilts. How long RBI can afford to have the investors/lenders in risk-off mode when monies have to be diverted to fund productive assets for capacity utilisation (and expansion) to remove supply-side bottlenecks? MARKET PULSE has completed the chase of 8.40% 2024 from 8.40 to 8.65 to 8.0% since issuance and now see it as high risk chase into 7.90-8.0% for strategic play, as the risk-reward is not seen to be in favour of staying invested for big-picture play. Having said this, fleet-footed traders can trade end-to-end of 7.90-8.05% with tight stop on break thereof. The risk of bounce back of 10Y bond yield into 8.0-8.15% is not yet ruled out on squeeze in India-US 10Y bond spread into 5.50-5.65% driven by spike in US 10Y into/above 2.35-2.40% support zone. At this stage there is good appetite for Gilts both from domestic and foreign investors and it is possible that both can switch sides on dilution in domestic euophoria or improved perception in external dynamics. It is also not certain at this stage the sustainability of Crude Oil beneficial impact on the system. All taken, it is not prudent to stay over-weight on Gilts for strategic play tracking sideways price-stability at 7.90-8.05/8.15%. It is also to be noted that RBI has no feel-good mood on 10Y yield sub 8% when Rupee is in nervous undertone driven by extended USD strength and FII mood reversal which can cause lumpy pull-out.
Moses Harding
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