Mr. Pankaj Pathak

In an interview with Anjali Raulgaonkar from Capital Market Publishers, Pankaj Pathak, Fund Manager, Fixed Income, Quantum Mutual Fund said, In view of the deteriorating macro indicators and risks emanating from global developments, we cannot rule out a pre-emptive rate hike by RBI in August policy meet and may be one more in this calendar year.

Excerpts:

 1. What are your views on fixed income market? How have the yields moved and which direction you see them moving in near to mid-term and why? What will the key driving factors for yields?

Indian Bond yields have moved up very sharply in last 10 months. The yield on 10-year government bond rose from 6.4% in June 2017 to close to 7.9% now. The primary reason for this up move was a sharp turn in the domestic macroeconomic cycle, unfavorable global markets and demand supply imbalance caused by tepid demand from PSU banks. In the last two months the government and the RBI announced series of measures from reducing the government's borrowing program to lowering the inflation projections and increasing debt investment limits for foreign investors to comfort the market. But it failed to reboot the investors' sentiment.

Inflation, fiscal position, external balances all are showing signs of deterioration. The Brent crude oil price is now at $80 per barrel. As India is big importer of crude oil, rising prices will increase the imports bill and will also add to inflation trajectory. While macros are deteriorating, global yields are also on upward march. The 10-year US treasury yield has crossed the 3% physiological level which was last seen in 2013. The reversal in easy money policy in developed has made the emerging market (EM) debt and currencies less favorable.

In view of the deteriorating macro indicators and risks emanating from global developments, we cannot rule out a pre-emptive rate hike by RBI in August policy meet and may be one more in this calendar year. But we do not expect bond yields, especially on the front end of the curve (1- 4 year maturity), to rise significantly from here as current spreads reasonably compensate for the inflationary risks. With inflation at 4.5%; Repo rate at 6.0%; a 3 year government bond is trading at 7.7% and a 3 year AAA PSU issuer has to borrow at 8.5%. Going ahead, market will closely watch the extent of MSP increases for the Kharif crops, movement in crude oil price and global yields.

2. What is your strategy for short term funds? What is your exposure to long term funds and why?

For fixed income allocation, we offer Quantum Dynamic Bond Fund (QDBF) which has flexibility to change the portfolio characteristics (within the investment policy framework) as per interest rate scenario. The QDBF invests only in government and top rated PSU securities .By its design the fund can take a form of long term debt fund or short term debt fund depending on the interest rate view. Our endeavor is to manage the interest rate risk on behalf of the investors so that they don't need to change their fixed income allocation when interest rate cycle changes.

We continue to maintain our cautious stance on rates with an eye of various risks to inflation path and external balances. But on the same time we also acknowledge that valuations have turned very attractive from historical spreads prospective. The recent sell off in the short term bonds seems overdone and at current levels the 1-4 years maturity bonds offer very attractive accrual yield. The Quantum Dynamic Bond Fund is positioned in the front end of the curve (upto 4 years maturity government and PSU securities) with a neutral rate outlook.

3. Have you made any changes in your funds after the Union Budget 2018-19? What and Why?

After the government raised its fiscal deficit target in the Union Budget for FY19, we reduced the maturity profile of our portfolio. In order to address the demand supply mismatch, government reduced the borrowing program later on and also lowered the maturity profile of its borrowings. But given the sharp rise in crude oil prices and INR depreciation in last two months, we maintained our low duration position to protect the portfolio from any external shocks.

4. What is your advice to the investors?

Investing in Bond funds does require some greater understanding on the part of investors in terms of understanding its risk / return profile as well as the need to invest for 2-3 years to ride out the volatility. Bonds funds are not Fixed Deposits and are subject to volatility in short term. We advise investors to have a longer time frame if they invest in bond funds and should also consider the possibility of capital losses in the short time horizon.

Given the current scenario, we advise investors to remain conservative in their returns expectations from bond funds and avoid long term debt funds. Alternatively, short term debt funds or dynamic bond funds offer an attractive investment route for debt allocation if held for next 2-3 years.

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