(Bloomberg) — A selloff in India’s sovereign bonds is poised to start.
Yields for 10-year bonds may surge almost 50 basis points in the next six months as the government unleashes a record borrowing program, according to a survey of 10 traders. The nation’s debt has been spared a global rout so far, but that’s about to change from April.
While global debt markets have seen record losses since a peak last year, a dovish Reserve Bank of India and a lack of new issuances since February have meant the nation’s bonds have been relative havens. Traders though warn that surging oil prices and a record 15-trillion-rupee ($197 billion) government borrowing program will soon break that calm, and further trigger a dash for the exit by investors.
“Global and local factors are indicating higher yields, and the start of supply next month will hasten it,” said Naveen Singh, executive vice president and head of trading at ICICI Securities Primary Dealership Ltd. The government should borrow less, say 55% of the total program, in the first half given their record of not being able to spend, he said.
Benchmark 10-year yields have climbed just seven basis points this month, compared with a 20-point jump in Indonesia, a benchmark in Asia, and about 70 points in U.S. Treasuries. The yield may rise to 7.25% by end-September and to 7.5% by December, according to a Bloomberg poll. Indian yields rose three basis points to 6.84% on Monday.
Technical analysis suggests that the yield may rise to 7.06% quickly once it breaks above the 6.86%-6.90% area after its recent sideways move.
The market saw signs of stress early this year with primary dealers rescuing multiple auctions and the central bank canceling a few sales. While there was a recent lull in India, the global situation has worsened with the war in Ukraine pushing up oil prices and the Federal Reserve hinting it may raise rates by 50 basis points at its next meeting.
Foreign investors have pulled out $583 million from Indian bonds in March so far.
Operation Twists
Once the borrowing program starts in April, the key will be ensuring adequate demand at yields the central bank is comfortable. Authorities are due to meet on Wednesday to unveil details of fiscal first-half borrowing plan, people familiar with the matter told Bloomberg News.
While the central bank supported the current fiscal borrowing program by buying bonds, most traders polled expect it to hold back for the new sales. Some suggest that the RBI could resort to the liquidity-neutral Operation Twists, where it buys long-term bonds and sells shorter ones.
Another concern weighing on traders is the pressure on RBI to raise rates as inflation breaches its 6% limit for two months. The central bank has so far said it continues to be supportive of growth and premature tightening would have proved counter-productive to demand.
“The current yield curve is discounting 75-80 basis points of rate hikes this year,” said Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management Ltd. There is a higher chance of Operation Twists in the first half than OMO purchases, she said.
(Updates yields in the fifth paragraph, first-half borrowing date in ninth)
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
