India rates: Positive catalysts, but sharp rally in 10Y bonds unlikely
A mix of domestic and external positive catalysts are expected to benefit INR bonds, but keeping down the long-end of the yield curve might prove a challenge.
Global yields have declined in recent weeks, dragged down by the US Federal Reserve’s recent dovish pivot. This fall in yields reflect moderating growth expectations in the developed markets, and likely dovish-for-longer central bank policies. Portfolio investors have returned to the regional high-yielding debt markets, including INR bonds; after a two-month hiatus, FPIs bought net debt of USD1.6bn this month, in addition to USD4bn into equities.
Concurrently, a domestic swap measure has helped to reduce FX implied rates, making it cheaper for corporates to raise USD funding and attract inflows. The swap auction held yesterday saw banks offer cumulative USD16.3bn vs a planned size of USD5bn; the RBI accepted USD5.02bn worth offers. The cut-off premium was set at INR0.776, not far from prevailing levels, capping forward premiums. The tool, released earlier in the month, will boost INR liquidity, in midst of an end-quarter, end-FY squeeze. Add to this, rupee has also staged a relief rally benefiting from easing politics-led uncertainty, though we are less confident that this will sustain.
Set against these developments, yields of the most traded 2028 INR sovereign bond eased back below 7.5% and (generic) 2Y yields stayed at sub-6.6% levels. The (generic/new) 10Y yield is back in the 7.30-7.35% range. The RBI-led policy committee is expected to lower benchmark rates by 25bps at next week's rate review.
Beyond near-term catalysts, longer-tenor yields are likely to find a floor as markets seek clarity on the frequency of similar swap auctions, likelihood of bond buybacks in FY20, and duration of the rate-cutting cycle. Eyes are also on the borrowing schedule for first half of FY20, after the interim budget announced a record quantum of borrowings/bond issuances.
FX: Signs of renewed emerging market stress
About a year ago emerging markets were stressed by a more hawkish Fed hike stance. While EM currencies have fared well from the Fed’s pause in recent months, they have not welcomed the Fed’s latest dovish tilt. In pushing the US 10Y bond yield below the Fed Funds Rate, this has given rise to fears of a synchronised global slowdown. It did not help that US consumer confidence in March came in at 124.1, well below the 131.4 consensus. Emerging Asian currencies should also pay attention to the weak Argentina peso for signs of renewed emerging market stress.
The Argentine peso hit a new record low of 42.72 on Tuesday. According to a survey of economists by the central bank, the peso is expected to depreciate further to 48, the upper half of the central bank’s pre-determined band between 39.26 and 50.81. Argentina is struggling with a recession at a time when the central bank is hiking rates to contain high inflation and a government committed to a balanced budget under its IMF package. Investors are worried that this negative mix may hurt the re-election prospects of market-friendly President Mauricio Macri at the general elections in October.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.