Global bond rally sidesteps India as deficit fears mount

By Kartik Goyal

India’s fixed-income traders have swung from joy to misery within the span of two weeks as the global bond rally passes them by.

Rupee-denominated sovereign bonds have lost more than half the gains they made since the government’s July 5 budget, as concern rises that authorities may sell more debt to finance further fiscal stimulus.

Confusion over plans to shift part of India’s 7-trillion-rupee ($100 billion) borrowing abroad is adding to the negative sentiment, along with weakness in the rupee, which is Asia’s worst-performing currency this month.

“Uncertainty is really killing the markets,” said Lakshmi Iyer, chief investment officer for fixed income at Kotak Mahindra Asset Management Co. in Mumbai, who’s turned to corporate debt and short-term bonds for shelter. “While bond yields globally are declining and heading toward negative territory, bonds in India are less enthused.”

The yield on benchmark 10-year sovereign bonds rose three basis points on Tuesday to 6.62%, adding to an increase of more than 20 basis points over the last two weeks. By contrast, yields fell about 35 basis points in Malaysia during the last fortnight while those in South Korea dropped 18 basis points.

Iyer said she sees India’s sovereign debt market staying range bound near current levels until clarity comes on the government’s spending plans and its foreign debt debut.

Bond yields around the world have been plummeting amid signs of a slowing global economy, with the stockpile of negative-yielding bonds across all markets hit a record $16.7 trillion last week.

“The dichotomy between Indian bonds and the global rally can be attributed to local supply fears on the back of talks of stimulus, coming at a time when the foreign-bond plan seems to have been shelved,” said Mahendra Jajoo, head of fixed-income at Mirae Asset Global Investments in Mumbai. “There is a reason for yields to come down.”