Fixed Income Market Outlook Dec24

Summary of macro events for the month of November 2024

(A) The highlight for month of November was complete Red Sweep in US elections which has raised some important concerns in near term like
1. Impact of tariffs on China and rest of world
2. Trajectory for US inflation and Fed rate cut cycle
3. Impact on EM flows, currencies and monetary policies
(B) Bond and currencies despite a complete red sweep did not react much as Trump trade which is Dollar strengthening and rise in US yields was largely priced in last month
(C) US yields m-om are lower by 15 bps, crude and dollar has been range bound as market awaits timing and actual execution of Republican policies
(D) Weaker than expected China policy announcements also weighed on Crude and commodity prices
(E) Fed continued with a 25 bps cut and we expect them to deliver another 25 bps in Dec cumulatively reducing rates by 100 bps this year
(F) Back in India, there were 3 major macro developments
1. Banking liquidity got into deficit due to big reduction in core liquidity on account of FX outflows
2. Q2 GDP for FY 25 came as a shocker @5.4% due to lower capex, government spending and slowing consumption
3. CPI for month of October came at 6.2% much higher than expected on account of rise in food and vegetable prices
(G) Bond markets yields in India have rallied by 5-10 bps across the curve in anticipation of some RBI action due to significantly tight liquidity and GDP shocker
(H) Slowing high frequency indicators, lower Q1/ Q2 GDP and muted festive season indicates RBI might be negatively surprised on GDP forecasts and hence we expect them to revise down their GDP projections by 40-50 bps for FY 25
(I) We believe that Dec policy will be a tough call but RBI can choose to overlook the near term concerns of CPI hump, currency depreciation and focus on deficit liquidity and slowing growth and can do CRR / Policy rate cuts by 25 bps

Strategy for the portfolios and outlook for markets

• We have been maintaining a higher duration across all our funds and guiding the rally in bonds since March 2024.
• We have already witnessed a more than 50 bps of rally in yields in 10-year bonds since the beginning of the year but positive demand-supply dynamics for government bonds and expected rate cuts will continue to keep bond markets happy, and we can expect another 25-30 bps of rally in the next 3–6 months.
• We believe that banking liquidity would remain largely in deficit for Jan- March 2025 quarter unless RBI intervenes in form of VRR or CRR cuts
• Deficit liquidity will lead to higher operative rate and some uptick and volatility in money market yields
• Due to favourable demand supply dynamics, we continue to have a higher bias towards government bonds in our duration funds
• As India's growth is still relatively strong and Fed rate cut cycle can be shallow, we do not expect RBI to be very aggressive in cutting rates.
• We believe that wit stance change RBI has already pivoted and expect RBI MPC to deliver 50 bps of rate cuts in next 6 months and believe every policy is live now for rate cuts.

Risks to view
We see currency as only risk to our long duration view. INR can see some depreciation which can delay the rate cuts and lower the quantum of rate cuts too

What should investors do?
• Investors should continue to hold duration across their portfolios.
• Incremental gains in long bonds would largely be post rate cuts.
• If there are no rate cuts in Dec policy, we can see some near-term volatility or rise in yields but directionally see yields for 10 year Gsec closer to 6.5% in next 6 months
• 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 30th November 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 may change depending on the market conditions. Axis AMC is not offering any investment advice/ recommendations.

Axis AMC is not guaranteeing / recommending returns on any investments.

This document represents the views of Axis Asset Management Co. Ltd. and must not 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.

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