Monthly Market Commentary September 2020


They also increased the HTM limit for banks to allow them to hold higher quantity of centre and state government bonds without having mark to market on those. The HTM (Hold to Maturity) limit for banks has been raised from 19.5% to 22.0% of NDTL (Net Demand and Time Liabilities). This increase can boost banks’ demand for government bonds by about INR 3.5 trillion.


These measures were supportive for the bond market. Bond yields across the maturity curve, fell sharply after the announcement. Yield on the 10 year benchmark government bond fell by about 20 basis points on September 1st, from 6.14% to 5.95%.


After the initial rally, the market entered into a narrow range and remained there throughout the month. Market sentiment weakened on fear of potential increase in government borrowings in the second half of FY21. 


The RBI conducted operation twist/OMOs every week and devolved 10 year bond auctions on primary dealers multiple times to guide bond yields lower. But it couldn’t change the market sentiment in material way. The 10 year benchmark was oscillating around 6.0% throughout the month.


Short term money market rates remained suppressed below the reverse repo rate in the month.  The yield on 2-3 months treasury bills remained in the band of 3.25%-3.35%.


The CPI inflation for the month of August 2020 came in at 6.7% yoy as against the market expectation of about 7.0%. The reading for the month of July also got revised downward from 6.9% to 6.7%.


In our opinion the recent spike in inflation is a temporary phenomenon and we expect the headline CPI inflation to cool down by the year end. That may open up some space for rate cut though we do not expect any reduction in policy rates in the October MPC meeting.


The government announced its market borrowing program for the second half of FY21 on September 30th. It kept the full year market borrowing unchanged at earlier planned Rs. 12 trillion and accordingly plan to borrow Rs. 4.34 trillion in the H2 FY21. We believe this is a temporary respite on supply front and the government will increase its market borrowing by the end of third quarter when they will have a better estimates of shortfall in revenues and spending requirements.   



Looking ahead we expect the RBI to continue to intervene in the bond markets through Open Market Purchases and Operation Twists to put a lid on long term bond yields. Thus bond yields may remain range bound in the near future.  


At current levels we see scope for short to medium term bond yields to go down. However, we expect the yield on long term bonds beyond 10 year maturity to move up with rise in supply pressure. 


Given our above view on interest rates, in the Quantum Dynamic Bond Fund (QDBF) portfolio we continue to focus on the 3-5 year maturity segment of the government bond curve. We expect this maturity segment to benefit for the RBI’s OMOs/operation twists and prevailing surplus liquidity condition.       


Quantum Dynamic Bond Fund (QDBF) takes higher interest risks, but does not take any credit risks and invests only in Government Securities, treasury bills and top rated PSU bonds.


We always suggest e investors to have a longer time frame if they invest in bond funds and should also note that the bond fund returns are not like fixed deposit and can be highly volatile or even negative in a shorter time frame.


Quantum Liquid Fund (QLF) prioritizes safety and liquidity over returns and invests only in less than 91 day maturity instruments issued by Government Securities, treasury bills and top rated PSUs.


We suggest, debt fund Investors to choose Safety (over Credit) and Liquidity over Returns while investing in debt funds.

The author of this article is Pankaj Pathak, Fund Manager-Fixed Income Quantum Mutual Fund

The views and opinions expressed are not of IIFL Securities,


Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. 

Risk Factors: Mutual

Fund investments are subject to market risks, read all scheme related documents carefully.

Source :–-september-2020-120101200018_1.html

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