The market is never stationary.
Learn to move with the economic cycles and study the yield curves to have a better sense of how you can optimise your returns at any given point.
2. Introduction
bonds of various tenures – forms interesting patterns depending upon
2
Learning the various shapes of the Yield Curve in different stages of the economic
cycle can offer insights useful in investment planning.
Interest Rates move with changes in the economic cycle. The
‘Yield Curve’ – a line graph created by plotting the interest rates of
the state of the economy.
3. Economic Cycles and the Yield Curves
3
Recovery Late Cycle
Expansion Slowdown
Steep Inverted
Flattish Low
We are Here
Economic Cycle
Shape of the Yield
Curve
4. Economic Cycle: Recovery
Borrowing Costs Low
Accommodative
Surplus
Moderate
Monetary Policy
Bank Liquidity
Credit Growth
Visual Proxy
Risk: Reward
Credit Spread
Inflation
Low Capacity Utilization
Low
Compressed
Low
When
Economy is in
Recovery
Stage
Interest Rates
Will Creep Up
Slowly.
The Yield Curve
will Steepen.
long end
short end
4
5. Recovery Phase: Post-Covid
THE ECONOMY
RECOMMENDED STRATEGY: ACTIVE DURATION MANAGEMENT
INTEREST RATES
5
-6.60%
0.70%
2.50%
20.10%
30-Sep-20 31-Dec-21 31-Mar-21 30-Jun-21
Quarterly GDP Growth (YoY)
3.0
4.0
5.0
6.0
7.0
1 Year 2 Year 3 Year 5 Year 10 Year
G-Sec Yield Curve as on 30 June 2021
6. Borrowing Costs Moderate
Slow Tightening
Neutral
High
Monetary Policy
Bank Liquidity
Credit Growth
Visual Proxy
Risk: Reward
Credit Spread
Inflation
Rise in Capacity Utilization
Moderate
Widens
High
When Economy
is in
Expansion
Stage
Yield Curve will
Flatten Slightly
due to Rise in
Short Term
Rates.
long end
short end
Economic Cycle: Expansion
6
7. Expansion Phase: 2005 – 08 Growth
THE ECONOMY INTEREST RATES
7
7.9% 8.1%
7.7%
3.1%
7.9%
8.5%
2006 2007 2008 2009 2010 2011
Annual GDP Growth (YoY)
31 Dec ‘06
31 Dec ‘07
5
6
7
8
1 Year 2 Year 3 Year 5 Year 10 Year
G-Sec Yield Curve
RECOMMENDED STRATEGY: ACCRUALS + SHORT DURATION
8. Borrowing Costs High
Tightening
Deficit
Moderate
Monetary Policy
Bank Liquidity
Credit Growth
Visual Proxy
Risk: Reward
Credit Spread
Inflation
Capacity Utilization Peaks
High
When Economy
is in Late
Stage
Yield Curve will
Invert due to
Rate Hikes,
Falling Long Term
Yields.
long end
short end
Economic Cycle: Late Stage
8
Initially Moderate;
Later High
9. Late Phase: 2010-16
THE ECONOMY INTEREST RATES
9
7.90%
8.50%
5.20% 5.50%
6.40%
7.40%
8.00%
2010 2011 2012 2013 2014 2015 2016
Annual GDP Growth (YoY)
0
2
4
6
8
10
12
1 Year 2 Year 3 Year 5 Year 10 Year
Inverted G-Sec Yield Curve on 1 Aug 2013
RECOMMENDED STRATEGY:
LONG DURATION AFTER POLICYMAKERS CHANGE
COURSE TO ADDRESS LATE STAGE MACRO
PROBLEMS
10. Borrowing Costs Moderate
Neutral
Deficit
Low
Monetary Policy
Bank Liquidity
Credit Growth
Visual Proxy
Risk: Reward
Credit Spread
Inflation
Capacity Utilization Falls
High
Compress
Falls
When Economy
is in
Slowdown
Stage
Yield Curve will
Fall to its Lows
as Rate Cuts
are Announced
Economic Cycle: Slowdown
10
11. Slowdown Phase: 2018 to 2020
THE ECONOMY INTEREST RATES
11
8.30%
6.80% 6.50%
3.70%
-6.60%
2017 2018 2019 2020 2021
Annual GDP Growth (YoY)
3.0
4.0
5.0
6.0
7.0
8.0
1 Year 2 Year 3 Year 5 Year 10 Year
G-Sec Yield Curve as on 31 May 2020
RECOMMENDED STRATEGY: LONG DURATION
16. Present Situation
WHAT DO ECONOMIC FORECASTS AND INDICATORS SAY ABOUT THE
CURRENT ECONOMIC CYCLE?
INDICATOR VALUE SIGNALS
GDP Forecast for FY23 7.6% Expansion
Inflation Forecast for FY23 6.7% Above Comfort Zone
Capacity Utilization (Mar 2022) 74% At Long Term Average
Credit Growth (Aug 2022) >15% YoY Above Recovery Levels
G-Sec Yield Curve Change
(Mar 31, 2022 to Sept 12, 2022)
+197 bps (1Y);
+36 bps (10Y)
Moving from Steep to Flattish
16
The Economy remains on a strong footing. Yield curve position reflects that we are in the
Middle of the Expansion Phase and there is still room left for interest rates to move up
Source: RBI
17. • Trends in the Real Growth Domestic Product of the Economy
indicates that we are currently in the expansion phase of the
economic cycle.
• As learnt so far, the expansion phase pushes up interest rates
overall and credit spreads also widen. This opens up
opportunities in accruals. It is a good time to invest in shorter
duration papers.
• Economic indicators like a strong PMI, rising inflation, rise in
GST collections, withdrawal of surplus banking liquidity, are
evidence of an expansionary phase.
• The time taken to move from one phase to another depends
upon evolving macros. Reasonably low inflation levels can
prolong the expansion phase; whereas credit events, global
cues or ‘Black Swan’ type events can accelerate the move to
the next phase
Summary
17
PMI: Purchasing Manager’s Index; GST: Goods & Services Tax
18. • Investment in Short Duration bonds is
suitable in the current fixed income markets
scenario.
• We believe floating-rate bonds (FRBs)
are suitable in a rising-rate environment
and hence recommend investing in
schemeswhichtake exposure to FRBs.
• We recommend investing in accrual
assets in a staggered manner to capture the
trend of rising bond yields.
Our Recommendations
18
19. Scheme Recommendations
19
FOR SCHEME NAME
Short-Term Parking ICICI Prudential Ultra Short Term Fund
ICICI Prudential Savings Fund
ICICI Prudential Floating Interest Fund
Medium-Term Accrual Investment ICICI Prudential Credit Risk Fund
ICICI Prudential Medium Term Fund
Mix of Accrual and Dynamic Duration ICICI Prudential All Seasons Bond Fund
20. Potential Risk Class Matrix
20
Disclaimer:
As per SEBI Circular dated , June 07, 2021; the potential risk class (PRC) matrix basedon interest rate risk and credit risk ,is as above
Sr No Scheme Name Position in the Matrix
1 ICICI Prudential Medium Term Bond Fund
2 ICICI Prudential All Seasons Bond Fund
3 ICICI Prudential Savings Fund
4 ICICI Prudential Floating Interest Fund
5 ICICI Prudential Ultra Short Term Fund
6 ICICI Prudential Credit Risk Fund
21. Riskometers
21
Please note thatthe Risk-o-meter(s) specifiedabove willbe evaluatedandupdatedon a monthly basis.The above riskometersare as on August31,2022. Please refertohttps://www.icicipruamc.com/news-and-updates/all-newsfor more details.
Macaulay duration is the weightedaverage termto maturityofthe cash flows from a bond.The weight ofeach cash flowis determinedby dividingthe presentvalueofthe cash flowby the price
22. Mutual Fund Disclaimer
22
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
All figures and other data given in this document are dated. The same may or may not be relevant at a future date. The AMC takes no responsibility of updating
any data/information in this material from time to time. The information shall not be altered in any way, transmitted to, copied or distributed, in part or in whole, to
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investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of
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