Real Yields Turn Positive First Time in Two Years: India Credit

Real Yields Turn Positive First Time in Two Years
A worker labors in a factory which produces oil from cotton seed in Wankaner, India. Photographer: Adeel Halim/Bloomberg

India’s inflation rate fell below bond yields for the first time in two years as international investors add to record holdings of the nation’s debt.

Wholesale-price increases slowed to 7.47 percent in December from 9.11 percent a month earlier, the Commerce Ministry said yesterday. Yields on 10-year government notes were little changed at 8.21 percent in Mumbai, according to the central bank’s trading system. The nation’s bonds have returned 1.42 percent this month, the best performance among 10 Asian markets tracked by HSBC Holdings Plc.

Global funds have boosted ownership of rupee debt by $3 billion this month to $29.1 billion, Securities & Exchange Board of India data show, on speculation slowing inflation will prompt policy makers to reduce borrowing costs after seven increases last year. The central bank will cut its repurchase rate by 50 basis points to 8 percent by year-end as inflation decelerates to about 7 percent, according to Nomura Holdings Inc.

“The positive real yield will further attract foreign fund inflows,” Vivek Rajpal, a fixed-income strategist at Nomura, Japan’s biggest brokerage, said in an interview yesterday. “Expectations of rate cuts mean that bonds can rally more.”

Rajpal predicts that the benchmark yield will drop to 8 percent by March.

Global funds have added to holdings of Indian bonds every day this year after raising ownership by a record $3.9 billion last month, according to official data. Inflation, which has slowed for three straight months, will be between 6 percent and 7 percent by the end of March, Finance Minister Pranab Mukherjee said in an e-mailed statement after the release of the wholesale prices data. The report comes a week before the Reserve Bank of India meets to review rates and monetary policy.

Better Returns

The inflation-adjusted yield on the nation’s generic 10-year bonds was 74 basis points, or 0.74 percentage point, yesterday, the first time investors earned a so-called real yield on the securities since Dec. 31, 2009. The real yield in China was minus 66 basis points, while South Korea’s was minus 40.

Yields in India on benchmark 8.79 percent notes due in November 2021 have dropped 12 basis points since Jan. 5, when central bank Deputy Governor Subir Gokarn said at a conference in Singapore that India’s “monetary cycle has peaked.”

“The drop in inflation is definitely good news for the bond markets,” said Anoop Verma, a fixed-income trader at Development Credit Bank in Mumbai. “The rally in bonds is likely to be sustained with inflation easing further and on expectation of cuts by the central bank around March.”

Verma expects the 10-year bond yield will drop to 8 percent by the end of the first quarter.

Wait and See

The Reserve Bank will await more data before cutting rates, according to HSBC Global Asset Management, a unit of Europe’s biggest bank that oversees $25 billion in Asian fixed-income assets.

“At this point, with just one inflation number, I wouldn’t be optimistic on bonds,” Gordon Rodrigues, a Hong Kong-based investment director at HSBC Global Asset, said in an interview yesterday. “I would expect the central bank to see at least two or three numbers to draw a conclusion.”

The rupee’s plunge in 2011 will add to price pressures in the coming months, Sujan Hajra, a Mumbai-based chief economist at brokerage Anand Rathi Financial Services Ltd., said in an interview yesterday. The rupee slid 16 percent last year, the most among Asia’s 10 most-traded currencies. India’s currency strengthened 0.7 percent to 51.0350 per dollar today.

Yield Allure

The cost of insuring the debt of State Bank of India using credit-default swaps has dropped 10 basis points this year to 385 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. Some investors consider the lender a proxy for the nation, which doesn’t have dollar debt. The swaps pay the buyer face value for the underlying securities should a company fail to adhere to its debt agreements.

India’s relatively high yields are adding to the allure of the nation’s bonds, according to Nomura. The difference in yields between rupee-denominated notes due in a decade and similar-maturity U.S. Treasuries was 632 basis points today. The comparable yield premium on Chinese securities was 155 and South Korea’s 102.

“The undercurrent is for a softer interest-rate regime,” Roy Paul, deputy general manager of treasury at Federal Bank Ltd. in Mumbai, said in an interview yesterday. “Investors may boost their bond holdings on positive real yields.”

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