The US Federal Reserve hiked policy rates by 75 bps (100 bps = 1.0%) at the FOMC meeting in September 2022 and with that took rates to the very lowest level of what it considered restrictive. Furthermore, with the Fed’s latest median forecast showing rates at 4.4%, 4.6% and 3.9% in end 2022, 2023 and 2024 respectively, markets will need to consider the impact of higher for longer policy rates across the world.
The ECB raised its policy rates by 75 bps and further indicated more than two and probably less than five upcoming rate hikes.
The fiscal expansionary “mini” budget announced by the new UK government received a harshly negative response from the markets and forced an extraordinary intervention from the BOE to stabilize the UK government bond as well as the local currency markets.
The RBI expectedly increased the benchmark policy repo rate by 50 bps to 5.90%. Expectations of the terminal repo rate in this cycle have increased since the FOMC meeting in September 2022 and the India’s repo rate is now expected to peak between 6.25% - 6.50%. RBI is expected to act to curtail volatility due to spill overs from aggressive monetary policy actions and even more aggressive communication from Central Banks in Advanced Economies (Aes.)
Bond markets had rallied in the first half of September 2022 but gave up their gains in the second fortnight as aggressive action and commentary from the US Fed prompted a monetary policy reset and reassessment of trajectory of policy rates globally. Our nimble-footed approach again allowed us to navigate these conditions and we used the available opportunities to reduce the maturity in most of our funds before the September 2022 MPC meeting and added short maturity sovereign bonds post the MPC meeting.
Going forward, we see value in the short end and see this part of the curve to be attractive from an accrual perspective. We prefer sovereign bonds over high grade credit and will look at taking tactical exposure to liquid sovereign bonds.
We believe our bond funds remain suitably positioned to take advantage of the market opportunities and will aim to deliver inflation-adjusted real returns in these products.