In India, the central bank, on its own admission, is near the end of its rate tightening cycle because rates are near normal.
And, in the US, authorities are preparing the ground for another round of money injection or quantitative easing. When we look at our forecast for both countries, we dont see anymore widening of the spread from here, said Indranil Sengupta, chief economist of Bank of America-Merrill Lynch.
It will be range-bound, he said. Domestic yields are expected to come down as RBI gradually adopts a softer monetary stance because inflation has softened, economists said.
On October 25, the 10-year bond spread was 554 basis points a huge jump from 385 bps at the beginning of the year.
The India-US gilt spread steepened since January. Now it is will come down as US yields fall on Federal Reserves likely quantitative easing by buying back Treasuries to aid the economys recovery.
We are near the peak in Indian bond yields, and they are likely to go down as we are expecting RBI will be less hawkish going forward, said Vivek Rajpal, India rates strategist, Nomura Financial Advisory.
The Reserve Bank of India, like other central banks in Asia, will not tighten policy rates further in the current climate of weak growth in demand from the advanced countries, he said.
With inflation slowing, RBI is likely to soon halt rate hikes or at least introduce a pause in the cycle that began earlier this year and has involved five rounds of hikes so far.
A section of the market albeit a minority expects the pause could be signalled as early as in the next monetary policy review on November 2.
That optimism is based on slowing pace of inflation.
The key inflation level that would persuade RBI to slow or end rate hikes is 8%. Reaching there may not be far off in August and September, headline inflation hovered a wee bit above 8.5%, down from 11% in April.
Although inflation in September (at 8.6%) was marginally higher than expected, it does not change the moderating trajectory of inflation, Rajpal said in a recent research note.