Fixed Income Review - Key Market Events & View - January 2021

Key Market Events
• Budget 2021 – Go Go Growth
In a bold move the honourable finance minister, Nirmala Sitharaman, delivered a pro-growth budget. Spearheaded by government spending on long term projects including infrastructure, the government aims to get the economy out of the Covid shadow. The budget also aims to build on the work done during the lockdown in supporting growth and making structural reforms. Notably, the government extended its fiscal consolidation timeline in the process to reach a fiscal deficit level below 4.5% of GDP by 2025-2026.

• RBI Monetary Policy – As Expected
The MPC kept the repo rate unchanged and retained its accommodative stance. In an attempt to allay heavy bond supply concerns, the RBI acknowledged that gradual phasing out of CRR would allow for liquidity injection via market friendly tools. While we do not expect liquidity withdrawal measures to be undertaken immediately, the policy normalization of bringing the operating target rate towards the repo rate would play out during FY2022.

• RBI’s Repo Push
The RBI drained Rs 2 lakh crore worth of liquidity from the system via the 14-day reverse repo auction as it began the process of normalizing liquidity operations. The cutoff for the auction was set at 3.55%, 20 bps higher than RBI’s reverse repo rate of 3.35%. The aggressive cutoff was a clear signal to the markets that the RBI would nudge the markets to normalize market rates across the curve.

• Inflation – Finally Food inflation cools!
CPI inflation moderated to 4.59% in December as against 6.93% in November. Food inflation moderated to 3.4% (9.5% in November) led by vegetables ((-)10.4%). Core inflation came in at 5.2%. The MPC raised its target for inflation targets to 5.2% for Q4:2020-21, 5.0% -5.2% in H1:2021-22 and 4.3% for Q3:2021-22 citing food inflation and global crude prices. Rising rates, also give the RBI impetus to turn hawkish in its future policy actions.

• Around the world – Synchronous Global Growth
As the global economy enters a new phase of its V-shaped recovery entral bankers and policy makers anticipate a faster return to pre-covid GDP path. EM growth is likely to rebound on the back of both domestic and external tailwinds.

Market View
The budget was a surprise for the debt markets. The deviation in FY 21 fiscal deficit entails additional supply of Rs. 80,000 Cr of market borrowing. In addition, the FY 22 fiscal deficit estimates point to significant borrowing expectations. The gross borrowing target of FY 22 is pegged at Rs 12 lakh crore.

The G-Sec curve has already seen a ~40 bps sell-off since the budget as markets factored budget announcements and the proposed borrowing calendar for FY22. We believe we are ‘well and truly’ in a rising rate environment and investor portfolios should look to pivot accordingly. We have begun witnessing larger sell offs across the 1-5-year bond segments as accommodative monetary policy measures are being rolled back. We reiterate our stance that in the current environment 2-4 year assets are likely to underperform.

Across our schemes today, portfolio positioning looks to play the ‘reinvestment theme’ and barbell strategies. We have consciously reduced portfolio maturities across our products in line with our view. Select long bond strategies continue to offer opportunities for investors looking to lock in long term rates.

In our short and medium duration strategies we are following barbell strategies – a strategy where we mix long duration assets (8-10 year) with ultra-short assets including credits (Up to 2 years) to build a desired portfolio maturity. The ultra-short assets will help us play the reinvestment trade whilst limiting the impact of MTM as yields rise. Long bonds will likely add value in capturing higher accruals with relatively lower credit risk and lower MTM movement in the current context.

In Summary
• Yields across the curve have hardened by 40 bps in a relatively short span
• We anticipate the next leg of the selloff to be more gradual. The reinvestment theme is an ideal play in rising rate environments
• 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 88 days.

Axis Ultra Short Duration Fund
The fund is a short term 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 30% in non AAA assets. The current duration of the fund is 134 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 246 Days

Axis Corporate Bond 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. As the yield curve normalizes, the 2-4 year segment is likely to underperform. Currently the portfolio is a mix of G-Sec/AAA long bonds and short term paper (Up to 18 months). The barbell 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 1.6 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).
Currently the fund is completely invested in AAA securities within the 1.0-1.5-year maturity bucket. The fund will continue to invest in residual maturity bonds within this maturity bucket to take advantage of the ‘carry’ opportunities in this space. The current duration of the fund is 1.4 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 portfolio allocation consists of a mix of 1 year corporate bonds and money market instruments coupled with a small allocation to long corporate bonds. The corporate bonds exposure largely favors higher rated instruments. The current duration of the fund is 1.6 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 of 100-150 bps 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 2.1 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 1.3 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 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. Given the steepness in the curve the strategy aims to lock in rates at currently elevated yields to capture both ‘carry’ and capital appreciation. Improving macro-economic conditions are likely to address such elevated spreads and normalize markets at the long end of the curve. Currently the fund’s duration is 6.6 years.