Yields likely to inch towards 7.50%

Another eventful week goes by where volatility remained subdued, major stock indices bounced back strongly with S&P recording its best weekly gain after December 2011. The G20 meeting in Buenos Aires and the US-China meeting in the sidelines will be key events to watch in the week ahead. Fed chairman Jerome Powell says rates are just about normal and it triggers talks that the dot-plots will see changes post-December tightening if any. The US 10-year moves below 3% which is a chartists' delight. Oil dips below $50 and Indian rupee and bonds have their best month this year. That was a nutshell summary of the week that went by.

The global markets heaved a sigh of relief as the European Union (EU) approved the Brexit deal and paves way for further negotiations. The week, however, ended with anticipation of developments in the G20 meeting, particularly hopes of a ceasefire between US-China tensions dominating market expectations. G20 gathering has never rocked markets in recent years and therefore not much expected from the main event. The backdrop is one of receding optimism where growth appears to have peaked globally.

Barring some jawboning from the Fed chairperson when he stated "that the federal funds rate is just below a neutral level that would neither stimulate the economy nor rein in growth to curb inflation", which the market interpreted as an attempt to moderate pessimistic expectations on aggressive rate hikes by the US Central Bank. A quarter-percentage-point hike is widely expected in the December meeting and future hikes will largely be data-driven. Economic data and Powell's comments pushed the yield on the benchmark 10-year note below the 3.0% threshold for the first time since mid-September. The decline in crude oil prices also weighed on many high yield issuances, particularly in the energy sector.

Indian markets finally appear to have its moments under the Sun as the local currency closed strongest in four months. The momentum continues to favour rupee strength as the foreign institutional investors (FII) pumped in their highest investments this financial year. Indian benchmark 10-year bond yield broke below key support 7.60% briefly. One hopes the good run will last this month so that bond valuations improve and released blocked capital for better purposes.

To place it in perspective, there are significant changes in perception this quarter (Q3). Market participants were bracing for more than a couple of rate hikes and tight liquidity for the remainder of this fiscal. However, the NBFC crisis has first demanded a different dispensation on liquidity. Second, benign inflation and RBI's OMO largesse has improved sentiments vastly and short end of the rates and swap curves have responded positively. Falling crude couldn't have come in at a better time. Overall, the sentimental bonhomie is here to stay for a while it appears.

GDP data for Q2 came in quite disappointingly, at 7.1% against consensus expectations of 7.5%. The ongoing controversy over revisions of base year data notwithstanding, the growth rate is certainly disappointing and portends some gloom for the full year. Second half numbers may also be less enthusing as broader monetary conditions of higher rates, lower liquidity and NBFC debacle may result in subdued growth. This may lead RBI's MPC to remain pat on rates (MPC meets during the week) and in fact the prospects of further tightening itself take lower probability. With leading agencies and economists clawing back their GDP growth estimates, there is a fair chance that MPC may dole out some concessions either on the liquidity front or on the rates front. Benchmark yields will inch towards 7.50% within a 7.50-7.70% broader range.

GOOD TIMES

• Indian benchmark 10-year bond yield broke below key support 7.60% briefly
   
• Market participants were bracing for more than a couple of rate hikes and tight liquidity for the remainder of this fiscal

The writer is a market expert