After riding on a wave of unprecedented liquidity through the first half of the year 2017, India’s bond market has been grappling fiscal slippages and faster-than-expected rise in UST yields, which Singapore-based DBS Bank said will continue to remain challenging. However, some value might emerge after the sharp sell-off over the past six months, it added.
The benchmark 10-year government bonds inched up last week, marking the first consecutive weekly gains since November 2017. However, in addition to renewed supply pressure into FY19 domestically, developed market yields are likely to rise further. “Under these circumstances, IN gov yields are still likely to face upward pressure. However, we think that the bulk of the selloff may be behind us and yield increases are likely to be more modest going forward,” DBS said in a note.
There were four major reasons that led to temporary relief last week:
Lower Inflation: The CPI inflation in the month of February eased sharply to a four-month low of 4.4% from 5.1% in January and the likelihood of a softer March print has lowered the need for a tighter policy bias in April.
Liquidity injections: The Reserve Bank of India announced the auction of four Variable Rate Term Repo in addition to regular auctions to provide liquidity support of Rs 1 lakh crore to the banks during March 2018. It has provided relief in midst of a supply overhang.
Debt FPIs: There is a speculation is that the new framework for debt FPIs (Foreign Portfolio Investors) due in April might raise the G-Sec investment limit to 6-8% of outstanding issuance, from 5% currently.
Consolidating 10Y US yields: After the rapid pace of sell-off in the first two months of the year, longer-term 10Y US yields are consolidating. While a 25 basis point rate hike is factored in, US Fed’s assessment of the economy’s growth and inflation trends will be watched with interest.