Bonds may remain volatile around Budget

Global markets and political commentators are preparing for a new theme as this appears to be a regime of tax cuts and expansionary fiscal policies across major economies.

To start with, US President Trump has stated he will favour cuts in corporate tax rates and ease regulations to encourage corporates to invest in the US and create jobs. Likewise, UK Prime Minister Theresa May is looking to replicate a similar low-tax regime in Great Britain to negate the negative effects on investments if Brexit were to materialise. EU countries are also under pressure to cut corporate tax rates as they could become uncompetitive. Pressure is building across countries to lower tax rates in order to be competitive and lure global investments.

As a result, global equities advanced, led by US shares, with the three most-watched US indices — the Dow Jones , S&P 500 and Nasdaq Composite Index — all setting records during the week. The Dow Jones Industrial Average (DJI) closed above 20,000-mark for the first time in its 120-year history on Wednesday, after repeated attempts at the coveted mark post US elections. This could possibly herald a new era of Grand Rotation. Benchmark US 10-year note yield once again moved above the 2.50% mark during the week, only to end the week at 2.48%, in reaction to below-expectations US Q4-GDP numbers. Economic growth slackened to an annualised pace of 1.9% in Q4 from the 3.5% reading in Q3. Though the headline number was disappointing, adjusted for stronger export growth in Q3 and improving capital expenditure in Q4, the data will please the investor community.

Indian markets had a shortened trading week due to a holiday on Thursday. Bond yields remained firm for most part of the trading sessions with traders reflecting on an emerging bearish trend courtesy macro-economic developments. Suspecting limited room for monetary easing alongside fears over a loose fiscal policy which may result in a larger than anticipated supply of bonds in the next fiscal, traders have seen to be cautious. Late evening news of extension of bond maturities to the extent of Rs 37,000 crore should be a short-term positive. However, considering the fact RBI had extended maturities of bonds in the previous two fiscals as well, the announcement should not have significant impact

Moving ahead, all eyes are on the India's Union Budget 2017 now. The finance minister is widely expected to follow the global trend in lowering tax rates to make India globally competitive. While any such concession will cheer the stock markets, bond traders will closely watch the fiscal estimates and borrowing plan for cues. Close on heels to budget is the RBI policy review. So, a very cautious approach could be order of the day in the coming week.

Rate decisions by Bank of Japan and Bank of England, the keenly followed pay-roll data in US, will be the major events. Indian bonds may start the week flat and remain volatile around budget dates holding 6.35-6.45 range for a larger part of the week ahead.

The writer is executive director, Lakshmi Vilas Bank