Debt monthly view for February 2021

March 02, 2021

Fixed Income Monthly Commentary – February 2021

Bond markets had a shaky start of year 2021. Renewed optimism on economic recovery & fears of pick-up in inflation put the bond yields on upward path globally. Last 2 weeks had been particularly turbulent when the pace of rise in bond yields caught investors by surprise and caused panic in all the financial markets across oceans.

The US 10-Year treasury yield jumped to a year high at 1.60% before cooling off to close the month at 1.41%. This was still significantly higher than its previous month’s level of 1.07% and low of around 0.70% just five months back.

Indian bond yields also witnessed similar trend as the 10-Year Government Bond yield surged by about 32 basis points to end the month at 6.23%. Selling was more pronounced in all other maturity segments both at long and the short end where yields rose by 40-60 basis points in the same period. Spreads on Corporate Bonds and State Development Loans also witnessed pressure as their yields rose by somewhat higher proportion.

In the Indian context the biggest development in the month was the Union Budget in the first week of February. The government pegged the fiscal deficit for the financial year 2020-21 at 9.5% of GDP and set the target for financial year 2021-22 at 6.8% of GDP. These were much higher than the market expectations. The fiscal consolidation roadmap also got extended to lower the fiscal deficit to 4.5% only by fiscal year 2025-26. This was a big sentiment dampener for the Bond Market which has to absorb a much higher quantum of Government Bonds over many years.

The RBI though extended its support through words, failed to give any outright commitment in the form of OMO schedule or quantum of its purchases. Nevertheless, they bought more than Rs. 500 billion worth of long Government Bonds in the month of February 2021. But these had been of little help in absence of any clear roadmap.

Going ahead, RBI’s interventions will be key determinant for the trajectory of bond yields. Governor Das, at many occasions, have indicated that the RBI will continue to conduct more OMOs/twists to contain long term bond yields from rising sharply. This would put a lid on the long term yields or at least moderate the momentum.

In near term global bond yields, crude oil prices and RBI’s market intervention will continue to drive the bond markets. However, given the sharp rise in yields, there is a possibility of some retracement lower or consolidation around current levels.

Shorter Maturity Bonds seems good from valuation point of view. For reference Government Bond of 3-Years maturity (~5.0%) is trading at yield of more than 100 basis points of over the policy repo rate (4.0%) and more than 180 basis points over the effective overnight rate (Treps rate ~3.2%) as on February 2021.

For medium term, we maintain our earlier view that bond yields have already seen their bottom in this cycle and are likely to move higher over next 1-2 Year period.

In Quantum Dynamic Bond Fund portfolio, we were holding higher cash at the start of the month which we deployed later as valuations improved after selloff. Currently the portfolio is focused on the 5-15 Year segment of the Government Bond curve. This is a tactical position and we will continue to follow a dynamic approach to exploit any market opportunity.

In the Quantum Liquid Fund, we continue to focus on short term Treasury Bills and good quality PSU Debt Securities.

Investors should acknowledge that the best of the bond market rally is now behind us and should lower their return expectation from fixed income products. It would be prudent for investors to be conservative in their fixed income allocation despite have lower return compared to past.

Investors who have higher risk tolerance and longer holding period can take advantage of the market opportunities through dynamic bond funds while conservative investors with very low risk appetite should stick to very low duration funds like liquid funds.

Source: RBI

Name of the Scheme	This product is suitable for investors who are seeking*	Riskometer
Quantum Dynamic Bond Fund (An Open Ended Dynamic Debt Scheme Investing Across Duration)	• Regular income over short to medium term and capital appreciation • Investment in Debt / Money Market Instruments / Government Securities	Investors understand that their principal will be at Moderate Risk
Quantum Liquid Fund (An Open Ended Liquid Scheme)	• Income over the short term • Investments in debt / money market instruments	Investors understand that their principal will be at Low risk

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
The Risk Level of the Scheme in the Risk-o-Meter is based on the portfolio of the scheme as on February 28, 2021.

Disclaimer, Statutory Details & Risk Factors:

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