On Monday, the 10-year yield in India went as low as it has since 25 March. A bit of optimism around a US-Iran deal has brought down oil and given Indian debt a new appeal. It is enough to put our bonds back on the radar for those in search of yield, especially with the rupee holding up and some policy to be had.
Why the yield is sliding
You could feel the tension in global energy markets let up once US and Iranian sides put forward a rough deal to put an end to hostilities and open up the Strait of Hormuz. With the supply side no longer a worry, Brent crude was down 4.5% at $83.40 a barrel, the first time we have seen that price since 10 March.
And when oil goes down, bonds go up. The 6.94% 2036 note saw its yield drop 3.2 bps to 6.8637% during the day, the softest number in weeks. You are still 20 bps above where you were before the war, so there is a risk premium in there somewhere.
Oil shock in reverse
We had been seeing crude run up to $120 after things started on 28 February. Now the tables have turned and it is a relief for inflation, the rupee and the trade deficit. In that environment, a home-grown bond is hard to pass up.
Foreign flows and RBI’s playbook
The RBI has been making it easy for the likes of you to put in your money. Lately they have put out some rules to make hedging more palatable for banks with non-resident deposits and to let state-owned companies look for funding abroad.
And the foreigners have been there for it. In the six days since 5 June, they put in a net Rs 155.5 billion in bonds, which is more than they did in the period before. One way of looking at it is that over $1.6 billion has made its way into Indian paper in that time.
The policy is fine, but how you put it to work is what counts, say the traders. There is also the question of whether India will be added to the Bloomberg Global Aggregate Index; a review is coming this month and that would be a nice structural boost for the government’s books.
What you will be looking at in the short term:
– Steady inflows from FPIs
– More dollars on hand thanks to the RBI
– Any word on the index front
Global cues and the Fed risk
It is not just an Indian thing. The US 10-year gave up almost 6 bps to 4.42%, and that has set the mood for a worldwide lunge for duration. As long as central banks are in a dovish frame of mind, it should hold.
But for the moment, you have to wait and see what the Fed does this week. We figure the benchmark in India will be in the 6.85%-6.95% pocket, with the Fed’s rate moves and any volatility in oil calling the shots on capital and the curve.
What the levels tell us now
Last Friday, 12 June, the 10-year was at 6.8957%. That was a 7 bps weekly fall and the third one in a row. Monday’s new low eases things for the government a little, even if we don’t yet have the index money to show for it.
The currency is a factor too. The rupee opened at 94.68 on Monday, up 43 paise and the best we have had since 8 May, before moving to 94.5750. When the rupee is this steady, you don’t have to worry as much about imported inflation, and the bond bid can go on a bit longer.
There are those who think we can go further. A CIO in fixed income sees yields going to 6.75-6.80% as sentiment and FPIs pick up. But you want to see a signed agreement and some real movement on energy and fertiliser before you start to reprice for lower inflation.
At the end of the day, the market is where geopolitics and policy meet. Keep the oil in check and the 12-week low may not be where we bottom out. But if the Fed comes in hot or crude bounces back, 6.85%-6.95% is where you will be.
