Debt Market Overview

The Debt Markets players are currently having the time of their lives with turnovers exceeding 10 lak crore, The yields curve has become flat with 1yr yield almost equal to the 10 Year rates. The interesting thing to be noted is corporate debt is more stable and less volatile than Gsec. Which gives a lot of opportunity for investors to play on a Hold to Maturity angle. 

lets go thru some facts before i give my analysis and opinions on the way forward.

Weekly primary inflation continued to be sticky. Food inflation (week ended 30th October) was at 12.30% YoY, compared with 12.85% in the previous week, easing a little. 

Primary articles inflation was pegged at 14.87% and Fuel price index climbed to 10.67% YoY. The wholesale price index (WPI) climbed to 8.62% in September as compared to 8.51% in August. 

Food prices were expected to cool following normal monsoon rains and improved supplies, but so far have belied that optimism, putting at risk hopes for a substantial easing in headline inflation by end-December. 

IIP slips for 2nd consecutive month. The industrial output for the month of September rose at a much slower-than-expected 4.4% from a year earlier figure of 8.2%, lower than the previous month's revised annual growth of 6.92% (revised from 5.6%). Industrial output rose 10.2% for April - September period 

Manufacturing output rose at an annual 4.5% YoY in September 2010, while the mining sector grew only 5.2% YoY. Growth in capital goods came in at a -4.2% YoY. 

Liquidity continued to be extremely tight with banks borrowing on an average around INR 1,20,000 crore from RBI in this week. 

The money market yields continued to go up, as liquidity remained tight and primary issuances continued to pressurize the shorter end of the curve. 

The 3M CDs were quoting in a range of 7.90%-8.10% while the 1Y CDs were trading around 8.50%-8.60% 

The bond markets, which had perked up a bit after the buyback last week, failed to maintain the momentum, as RBI did not announce any new liquidity easing measures. With liquidity continuing to remain tight, yields drifted upwards with the 10Y bond currently trading at around 8.08%. The 2022 bonds were trading a tad lower at 8.05%-8.06% range. 

The week's auction cut-off came at market levels. The 10Y cut-off was at 8.10%

In my opinion investors should try to park funds in those schemes that follow a Hold to maturity style of Investment. why because first it avoids Interest rate risk and two the fund tends to gain from accruals. 

My suggestion would be to invest in FMP's also known as Fixed maturity plans and other hold to maturity schemes like Templeton India Income Opportunities Fund, ICICI's New regular Savings fund, Fidelity short term Income fund. 

look for funds with a 1% or more exit load for a year investment so as to insulate yourself from investor pullout. funds with a cap on corporate investments would be an ideal bet as it can insulate the scheme from liquidation loss. Corporate investments sudden pull out of funds usually affects the NAV of a scheme adversely.