India bond yield curve flattens on central bank unpredictability, demand for long-term debt
Indian bond yields are experiencing a flattening trend as the central bank's policy adjustments begin to influence borrowing costs. The Reserve Bank of India has hinted at possible interest rate increases, prompting a rise in shorter-term yields. ...
By Reuters |
ETMarkets.com
Shifts in the Indian central bank's policies and communication, from theearly closingof a window that encouraged dollar inflows to policy minutes thatsignalled interest rate hikes, have flattened India's bond yield curve as short-endyieldsrise while longer-term yields decline on strong demand.
Shorter maturity bond yields had fallen since June, helped by non-resident Indian dollar deposits and overseas debt raises that were being invested in short-term debt, while the Reserve Bank of India indicated little urgency to hike rates at its August meeting.
The past week saw both factors reversed, with the RBI's monetary policy committee minutes showing that higher borrowing costs are likely around the corner. A flatter yield curve makes short-term borrowing relatively more expensive and can signal uncertainty about the economic outlook.
"The curve could flatten further as FCNR deposit flows will stop earlier than envisaged by the market," said VRC Reddy, treasury head at Karur Vysya Bank. The yield on the 5-year government bond has jumped 20 basis points since the central bank held its policy rate on August 5 and was around 6.52% on Thursday, while the benchmark 10-year bond yield was at 6.85%. The spread between 5- and 10-year yieldsshrank to 33 bps, from 46 bps two weeks ago, with some brokerages now expecting the central bank to hike in December.
ULTRA-LONG CHEER
Demand for longer-duration debt from long-only investors such as insurers and pension funds, however, remains strong. On the supply side, lower state debt issuance in recent weeks has alsoadded to the appealof longer-maturity government securities, fueling their strong performance, Shobit Gupta, chief investment officer, Generali Central Life Insurance said. The spread between 10-year and 15-year bonds has narrowed 5 bps to 16 bps, while that between the 30-year and 40-year papers has squeezed 10-12 bps to 58 from 68 bps.
A key factor supporting the segment has been the change in the government's borrowing mix, which has improved demand-supply dynamics, Sachin Bajaj, executive vice president and chief investment officer, Axis Max Life Insurance, said.
Earlier in the year, New Delhi cut the proportion of supply of such papers to 25%, down from 35% last year.
Shorter maturity bond yields had fallen since June, helped by non-resident Indian dollar deposits and overseas debt raises that were being invested in short-term debt, while the Reserve Bank of India indicated little urgency to hike rates at its August meeting.
The past week saw both factors reversed, with the RBI's monetary policy committee minutes showing that higher borrowing costs are likely around the corner. A flatter yield curve makes short-term borrowing relatively more expensive and can signal uncertainty about the economic outlook.
"The curve could flatten further as FCNR deposit flows will stop earlier than envisaged by the market," said VRC Reddy, treasury head at Karur Vysya Bank. The yield on the 5-year government bond has jumped 20 basis points since the central bank held its policy rate on August 5 and was around 6.52% on Thursday, while the benchmark 10-year bond yield was at 6.85%. The spread between 5- and 10-year yieldsshrank to 33 bps, from 46 bps two weeks ago, with some brokerages now expecting the central bank to hike in December.
ULTRA-LONG CHEER
Demand for longer-duration debt from long-only investors such as insurers and pension funds, however, remains strong. On the supply side, lower state debt issuance in recent weeks has alsoadded to the appealof longer-maturity government securities, fueling their strong performance, Shobit Gupta, chief investment officer, Generali Central Life Insurance said. The spread between 10-year and 15-year bonds has narrowed 5 bps to 16 bps, while that between the 30-year and 40-year papers has squeezed 10-12 bps to 58 from 68 bps.
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A key factor supporting the segment has been the change in the government's borrowing mix, which has improved demand-supply dynamics, Sachin Bajaj, executive vice president and chief investment officer, Axis Max Life Insurance, said.
Earlier in the year, New Delhi cut the proportion of supply of such papers to 25%, down from 35% last year.
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