Foreigners Sell Most India Debt in a Month as Yield Benefit Ebbs

  • Spread over 10-year Treasuries narrows to four-month low
  • India government bond yields expected to soften: Western Asset

Indian sovereign bonds are losing some appeal as their yield advantage over Treasuries diminishes.

The extra yield investors demand to hold the South Asian nation’s 10-year notes over similar-maturity U.S. debt fell to 556 basis points on Monday, the least since early January, data compiled by Bloomberg show. The gap was as high as 616 in February. Foreign holdings of local government and corporate securities dropped by 15.9 billion rupees ($239 million) on Monday, the most since March 29.

“U.S. yields, after staying low for a long time, have started inching higher and the appetite for Treasuries is growing,” said Badrish Kulhalli, a fixed-income fund manager at HDFC Standard Life Insurance Co. in Mumbai.

The narrowing spread reflects both diverging monetary policies in the two nations and India’s success in reining in inflation. The Federal Reserve raised interest rates in December for the first time in a decade, while the Reserve Bank of India has lowered benchmark borrowing costs five times since the start of 2015.

The yield on Indian sovereign bonds due January 2026 was little changed at 7.47 percent in Mumbai, according to the RBI’s trading system. The rupee rose 0.1 percent to 66.5250 a dollar, ending a three-day losing run, prices from local banks compiled by Bloomberg show. The currency is down 0.6 percent this year in Asia’s worst performance.

Overseas holdings of rupee-denominated bonds have decreased by 41.6 billion rupees in 2016, according to data from National Securities and Depository Ltd. Even so, Western Asset Management Co. plans to buy more Indian sovereign debt, which still offers the second-highest yields among major Asian markets after Indonesia.

“With further RBI easing, Indian government bond yields are expected to soften, thus providing capital gains to cushion any rupee depreciation,” Desmond Soon, Singapore-based head of investment management in Asia outside of Japan at Western Asset Management, said in an interview.

Before it's here, it's on the Bloomberg Terminal.