On the back of easing inflation falling markets and slowing economy the central banks changed the liquidity tightening to easing bias and started cutting rates. The banking system is flushed with liquidity and banks are parking as high as Rs. 50000 crores under RBI LAF at 4%. The liquidity situation has become very comfortable therefore we have enhanced average maturity in the Bond short-term plan. The fund is positioned to reap the benefits of carry as well as spread compression in the corporate bond segment of the fixed income market. The current spreads are at 300 bps in the 3 and 5yr segment – which is significantly higher compared to the spreads we witnessed in the previous rate rally. While we do agree that there is general risk aversion in the credit segment – quality credit (combination of PSU and Pvt) does pose a huge investment opportunity. Most PSU are either partly or wholly owned by the Govt of India and therefore quasi-sovereign entities. The spreads therefore present an imminent compression theory going forward. While the spreads may not come off in a hurry, in the initial phase, these would act as high carry on the portfolio. Also the 2,3 and 5 yr yield are largely flat (yielding the same). With expectations of reverse repo cut going forward and easy liquidity in the system, this curve could steepen .i.e. shorter end could rally at a faster pace than the longer end, leading to a curve steepener.

This is what we endeavor to capture in bond short term, where corporate bonds varying from 2-5 yr maturity is held. The average maturity is capped at 3 yrs, with 25% allocated to cash for trading calls and positioned at the shorter end of the yield curve. This combination makes it ideal for being recommended from a 1 to 3m perspective.