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Global Debt Market Outlook: June ’18

Investment Strategy

Uncertainty often induces fear in financial markets. Developments in the local and global economy leave room for rate hikes. If bond yields rise, longer-term portfolios will be impacted the most. The sensible choice would be to focus on diversifying risk through asset allocation and investing in high-quality instruments.

 

 

Market Outlook

As far as debt markets are concerned, there is little visibility on the way forward. Globally, central banks are adopting diverse methods to deal with the challenges of their economies. Domestic concerns are centred around inflation and crude oil prices. The RBI is justified in maintaining a neutral stance amidst so much uncertainty.

The US economy appears to have regained strength, evidenced by economic growth and employment statistics. Concerns that short-term yields are inching closer to long-term yields (flattening of the yield curve) are not deterring the Fed from following its course towards hiking interest rates. Historically, this has been an indicator of economic recession.

Meanwhile, the ECB seems to be adopting a more measured approach. It has committed to wind down its Asset Purchase Program by the end of 2018. It is in no rush to tinker with interest rates and may only begin raising rates a year from now. For the ECB, the focus is on maintaining favourable liquidity conditions and keeping inflation below the 2% limit.

Of mounting concern is the United States’ trade war with China. While the US may appear to have the upper hand, it will deal with its fair share of blows in the form of rising inflation, job loss, and lower profitability. Financial markets are already reacting to the rising tensions and the effects of any trade war will not be isolated to China and the USA alone.

Monetary Policy Highlights: February 2018

 

Investment Strategy

With higher uncertainty in debt and equity markets, this would be the time to review asset allocation and manage risk. There is now an opportunity to construct a layered debt portfolio. A phased transition out of ultrashort-term funds into high-quality accrual funds may be warranted.

Policy Highlights

This policy indicates that the RBI has greater visibility into inflation and growth projections and are comfortable with the current stance and policy rates. While near-term inflation is on the higher side, the central bank expects inflation pressures to stabilize in the coming financial year. Rising crude and commodity prices will continue to push inflation upwards, but a normal monsoon and controlled food supply will moderate this effect. Further, oil prices have moved both ways in the recent past, making it difficult to be certain that they will remain at elevated levels.

Fiscal Slippages

The reserve bank has continuously cautioned against fiscal slippages. Last year, farm loan waivers were a concern. This year, it is the government’s fiscal deficit target. Fiscal slippages increase inflation and lower creditworthiness and will have a bearing on capital flows.

Global Factors

Across the world, bond markets are correcting. Advanced economies are witnessing higher yields now. For instance, the yield on the 10 Year US Treasury is trading close to 3%. A weaker dollar has caused oil and commodity prices to rise, increasing domestic inflation. All these global factors have contributed to the rise in domestic yields.

 

 

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