Budget seen reviving appetite for government bonds
12 July 2019
Government bonds are seen to be in demand after the union budget 2019-20 raised government’s borrowing target, with plans to shift borrowing to overseas markets were interest rates have fallen.
This is a reversal of the trend witnessed since November 2017 when bond yields started a downward trend. The yield on the 10-year benchmark bonds fell 5 basis points to 6.982 per cent in May, the lowest level since 22 November 2017.
Bond yields had fallen by 42 basis points in May, the most since November 2016, helped by foreign inflows after Prime Minister Narendra Modi’s election win in 2014. The Indian rupee, on the other hand, ended at a one month high at 69.27 a dollar, up 0.63 per cent from its previous close.
The declining yield was attributed to falling crude oil and slowing economic growth which boosted speculation of monetary easing by the Reserve Bank of India (RBI) in its next bi-monthly policy.
According to HSBC< India’s five-year yield has fallen about 18 basis points since 4 July, the day before the federal budget, compared with around a 23-basis point drop in the 10-year yield to levels last seen in September 2017.
But, on Friday, the government surprised investors with a budget that pared fiscal-deficit target and announced a plan to borrow about $10 billion overseas. The fundraising will help ease the pressure on the local market from the proposed Rs7,10,000 crore borrowing target for the year ending March 2020.
Global investors have bought a net $953 million of local debt so far this month, after plowing $1.2 billion in June, data compiled by Bloomberg show.
Also, with much of the developed world debt offering negative or negligible yields, and stock markets hit by slowing global growth and weakening prices, investors are looking to Asian markets as they look to borrow-low and invest-high.
Bond markets in Asia still offer a decent yield premium over US treasuries, and the still high interest rates in Asia could lead to further rises in bond prices, say analysts.
Indian 10-year government bond’s yield is 4.5 percentage points over comparable US treasuries, just behind Indonesia’s spread of 5.2 percentage points.
The higher spreads on bond yields combined with the strong performance of currencies in Indonesia and India this year also make them carry trade favourites.