Fixed Income Review

Key Market Events
• US Fed Remains ‘Hawkish’ targeting sticky inflation
Statements from ‘Jackson hole’ indicated inflation targeting in the US would affect growth prospects in the medium term. Overarching focus of the monetary policy aims to bring “price stability and get inflation within 2% target even though it will entail sustained periods of below trend growth, softening labor market and pain for households and businesses”. He also hinted at another ‘unusually large’ increase in Fed fund rate in the coming FOMC meeting in September.

• India becomes 5th largest economy in GDP terms; Q1 GDP below estimates
India retained the tag of the fastest growing large economy with a Q1 GDP print of 13.5% on the back of low base effects. The prints indicate domestic demand remains healthy, supported by private consumption growth. Weaker than expected manufacturing growth & high cost commodity driven weakness in the external sector affected the overall GDP print. Oil below US$100 and the sharp fall in industrial metals imply this weakness are likely to strengthen the next series of GDP prints.

• INR – Strong against most trading members
INR has remained relatively stable successfully navigating pressures against the US Dollar. On a YTD basis, INR has depreciated 7% vs. USD but has appreciated 5.6% vs. EUR.

• INR Bond Inclusion – Clamor Grows
JP Morgan Global Indices has been collecting feedback from global investors in the past two months. There are two key takeaways: 1) The index team now has more incentive to include India on the back of Russia's exclusion; and 2) Most GBI-EM investors either support or don’t object to the inclusion. Given the large size of the domestic bond market, an inclusion would be a sizable change to EM indices implying inflows of ~US$30 billion over the next 18 months

• Oil continues its downward descent; Commodities key to inflation cool off
Despite ongoing geopolitical turmoil, weak growth prospects have dampened commodity prices. Brent Crude ended at $96.49/bl for the first time since Jan 2022. Commodity prices have exasperated inflation across the world. Peaking commodity prices bode well for the inflation problem.

Market View
The worst is behind us! Policy makers have been grappling with the inflation challenge for the last 2 years. While the RBI has successfully managed domestic inflation through monetary policy thus far, roaring inflation across the developed world continues to remain worrisome. Despite hawkish policies, inflation across developed markets continues to remain at record levels. Markets today have priced in much of this pessimism and hence we believe that the worst is behind us.

Domestic macro continues to remain strong. This is evident through high frequency indicators like credit growth, GST collections, credit card spends, UPI payments etc. Stable currency and return of FPI flows have also cushioned the economy. For bond markets this can be seen as a positive. The 10 Year G-Sec has new returned to levels last seen in early April (~7.20%) retracing much of the pessimism that was priced in. Our call to migrate portfolios to relatively longer tenor assets, over the last few months, has played out well so far.

Incrementally, we believe inflation has peaked at least locally. Falling oil prices, food prices and even metal prices are likely to give comfort to the RBI that the inflation cycle is nearing an end. While we do not anticipate the end of the rate hike cycle just yet, market yields are unlikely to rise materially from here. Markets have priced terminal rates close to 6.25% - 6.50% levels which implies markets pricing in policy rate increases of up to 100 bps from current levels.

For investors with a medium term investment horizon, we believe the time has come to incrementally add duration to bond portfolios. This however does not imply approaching the extreme long end of the yield curves as inherent volatility could be a factor in the near term. The impending inclusion into global bond indices could result in long term flows into government bonds which may result in capital gain opportunities for investors.

The current yield curve presents material opportunities for investors in the 4-year segment. This category also offers significant margin of safety given the steepness of the curve. For investors with medium term investment horizon (3 Years+), incremental allocations to duration may offer significant risk reward opportunities. Spreads between G-Sec/AAA & SDL/AAA have seen some widening over the last month which could make a case for allocations into high quality corporate credit strategies. Lower rated credits with up to 18-month maturity profiles can also be considered as ideal ‘carry’ solutions in the current environment.

In Summary
• Markets have priced in much of the incremental rate action. The worst is behind us
• Yields have begun to normalize after excess pessimism. Investors looking to lock in elevated rates must act to take advantage of sporadic duration opportunities
• The kink on the yield curve in the 4 Year segment, makes this an ideal segment for medium term investors
• Credits continue to remain attractive from a risk reward perspective give the improving macro fundamentals.

Current Strategy

Axis Money Market Fund
The fund is a short term solution to park funds in a portfolio which endeavors to offer a portfolio with 100% A1+ rated papers from the carefully crafted universe of money market instruments. This strategy is ideal for investors with an investment horizon of 6 months to 1 year. The fund attempts to offer better risk reward opportunity over other traditional alternatives in short term space. The current duration of the fund is 132 days.

Axis Ultra Short Duration Fund
The fund is a short Duration solution to park funds in a portfolio which endeavors to offer a portfolio with lower volatility and higher carry. The fund is ideal for investors with an investment horizon of 3-6 months. The fund predominantly invests in a mix of corporate bonds (50%+) and money market instruments and try to capture higher carry by investing up to 20% in non AAA assets. The current duration of the fund is 142 days.

Axis Treasury Advantage Fund
The portfolio is expected to benefit substantially from change in liquidity stance of RBI and opportunities in the short to medium duration corporate bond space. The fund is ideally positioned to manage the rising rate environment by playing the reinvestment theme while retaining the overall maturity profile. The strategy is idea for investors with an investment horizon of 6-12 months. The current duration of the fund is 217 days.

Axis Floater Fund
The Axis Floater Fund is an ideal solution for investors looking at short to medium term investment solutions aimed at generating superior risk adjusted returns across market cycles.

The fund portfolio has transitioned to portfolio of sovereign rated instruments with a residual maturity of 4 years. The 4-year segment is a sweet spot given the ‘kink’ in the yield curve and the relative risk reward opportunities for investors looking to lock in medium term interest rates. Correspondingly, the fund will also hold short tenor interest rate swaps designed to keep the nature of the fund in line with its investment mandate. The current duration of the fund is 2.79 Years.

Axis Corporate Debt Fund
The fund endeavors to capture opportunities by investing in best ideas across the corporate bond curve. The fund will typically maintain duration range of 2-4 years and will have a high quality bias. Currently the portfolio is a mix of G-Sec/AAA long bonds and short term paper (Up to 18 months). The strategy aims to capitalize on the ‘carry’ play at the long end and capital gain from the short end. The mispricing of select higher yield bonds offers room for gains from market compression/normalization in yields of such papers. The current portfolio duration of the fund is 1.84 years.

Axis Banking & PSU Debt Fund
The fund targets stable returns with high credit quality and liquidity predominantly through investment in Debt & Money Market Instruments issued by Banks, Public Financial Institutions (PFIs) and Public Sector Undertakings (PSUs).

The fund has completed its roll down strategy and has commenced redeployment into fresh AAA instruments with a residual maturity of 3.5 to 4.5 years. The new strategy will also endeavor to hold assets till maturity. Given that the 4-year space is a sweet spot such a strategy is ideal for medium term investors looking to take advantage of the current opportunities in the debt markets. The current duration of the fund is 1.81 years.

Axis Short Duration Fund
The fund follows a high quality & low-risk strategy endeavoring to generate stable returns. It aims to capture opportunities in the yield curve spreads in the short duration segment.

The fund tracks corporate bond v/s Money market instruments spreads closely while making its allocations. The current portfolio allocation consists of a mix of medium duration G-Secs & corporate bonds mixed with money market instruments. The fund strategy aims to leverage active duration calls to generate risk adjusted returns keeping in mind the current macro-economic environment and market opportunities. The corporate bonds exposure largely favors higher rated instruments. The current duration of the fund is 1.61 years.

Axis Strategic Bond Fund
The fund as part of its investment mandate aims to invest 50-60% in AAA bonds with overall portfolio duration target range of 3- 4 years. The spreads in short non AAA corporate bonds over AAA currently looks attractive from a risk reward basis and hence the fund is allocated assets to these securities on an incremental basis. The portfolio design should help generate stable returns while bringing down volatility relative to a longer duration fund. Currently, the fund has duration of 2.73 years.

Axis Credit Risk Fund
The fund is positioned to benefit from its core allocation in short term corporate bonds (Below AA+) i.e. in the 2-3-year space. The current duration of the fund is 1.57 years. The focus of the fund is to capture the credit spreads compression in the 1-4 year corporate bonds and also have a higher ‘carry’. In the current environment the fund has tactically allocated to AA & A names where we believe the risk reward is attractive from a carry play.
Given our market view on improved credit environment, improving corporate profitability and looking at a favorable risk reward perspective the fund will continue shifting its allocation to lower rated corporate bonds (below AAA rating).

Axis Dynamic Bond Fund
The fund is positioned as long bond hold to maturity strategy investing in AAA corporate bonds and government securities. The flat yield curve at the longer end of the curve makes the current positioning of the strategy attractive for medium to long term investors. The fund is ideally suited for our current call to incrementally add duration in investor portfolios in a calibrated manner. Currently the fund’s duration is 5.58 years.