Throughout India, the supply of 10-year bonds is so good that investors still seek refuge from other tenors.
This is clear when just two months after an analogous offering the government declared the offer for a new 10-year bond rather than selling it just once a year. Several investors expect a supply surplus to reduce the baseline debt appeal while extending competition across tenors.
Earlier there was a huge divide in which only one bond accustomed to dominating the bulk of the market liquidity and other bonds were totally on the edge, “said Suyash Choudhary, Head of Fixed Income at IDFC Asset Management Ltd.” If the market liquidity distributes between two to three bonds when it begins to happen, this might be an unintended outcome that could be beneficial.
The government has already sold around 1 trillion rupees ($13.4 billion) of the 10-year bond benchmark since it was first released in May. Choudhary estimates that each quarter the government will have to sell a new benchmark to complete its Rs.12 trillion issuance plan for the fiscal year ending March 2021
On Tuesday, the latest yield on the 10-year bond rose to 5.88%, the highest benchmark bond in four weeks on the news of the new sale, although the 6.19% 2034 yield on bonds declined by two base points. While the benchmark return has since decreased, transferring investor appetite to other participants could boost market competitiveness and strengthen the price discovery of the nation’s bond market of 850 billion dollars. “This is excellent for surrounding bond pricing,” said Choudhary.
The sudden 40 basis point rate cut by India’s Reserve Bank during May, 2020 has reduced Indian debt’s appeal and the possibility of a further rise in government borrowing remains strong as Asia’s third-biggest economy is seen contracting through March 2021 in the fiscal year.
“The FX hedging expense of investing in Indian bonds, with implied yields of about 5-7 percent, is relatively higher than most global peers,” said Prashant Singh, senior debt portfolio manager at Neuberger Berman Singapore Pt. Concerns about a growing deficit and a reduction of credit ratings are also causing outflows, he said.