Asia’s Best Bonds Boosted as Morgan Stanley Sees More Cuts

  • Ten-year yield set to drop to 6.50 percent by March 31: survey
  • Morgan Stanley forecasts inflation lower than RBI expectations

A bond rally that’s lowered India’s benchmark yields the most in Asia is seen extending amid speculation the central bank will add to Tuesday’s interest-rate cut.

The yield on 10-year sovereign notes will drop 17 basis points to 6.50 percent by March 31, according to the median estimate of 10 banks, brokerages and fund managers in a Bloomberg survey. It has already plunged 71 basis points over three months, the most in the region, to a seven-year low. Morgan Stanley expects a reduction of as much as 50 basis points in the key repurchase rate by March, while Nomura Holdings Inc. says a 25-basis-point reduction is likely in February, with December also being a possibility.

The Reserve Bank of India’s new six-member Monetary Policy Committee, led by Governor Urjit Patel, envisaged inflation on a path to meet the target of 5 percent by March 2017. Policy makers also reduced the so-called real rate target -- the difference between the one-year treasury-bill yield and the consumer-price index -- to 1.25 percent from a range of 1.5-2 percent earlier. 

The “lower real rate target opens up room for more easing,” Morgan Stanley economists, including Chetan Ahya in Hong Kong, wrote in an Oct. 4 report. “We expect near-term inflation reading to be lower than RBI’s expected trajectory.”

Three government-appointed economists and two RBI colleagues joined Patel in choosing to lower the repurchase rate to 6.25 percent from 6.50 percent unanimously. The easing was predicted by 16 of 39 economists surveyed by Bloomberg. It came after expansion in Asia’s third-largest economy slowed more than estimated in the first fiscal quarter and consumer-price gains eased to a five-month low of 5.05 percent in August.

“The outcome is clearly more dovish, with all the six members voting in favor of the policy rate cut,” Himanshu Malik, a strategist at HSBC Holdings Plc in Hong Kong, said after Tuesday’s announcement. “The RBI may not be yet done with the rate-cut cycle and further moderation in inflation in coming months could reinforce the structural decline in yields and greater expectations of additional rate cuts.”

The benchmark 10-year bond yield slid 29 basis points last month, the most in three years, as a global yield hunt and improving cash supply for local banks spurred demand. It was down six basis points at 6.67 percent in Mumbai, after falling four basis points on Tuesday. Malik predicts it to reach 6.40 percent by March 31.

To read more about the rally in Indian sovereign bonds, click here.

The policy panel said that though upside risks to inflation have moderated, they remain on the horizon, including a potential increase in house rent allowances for civil servants. It cited the U.S. election and crude prices as sources of uncertainty.

Morgan Stanley forecasts CPI inflation at 4.5 percent-4.7 percent by March, excluding the impact of the higher rent allowances, according to its note.

Bank of America Merrill Lynch expects a “final 25 basis point cut” in the repo rate on Feb. 7, Mumbai-based economist Indranil Sen Gupta wrote in a report. “We remain bullish” on government securities on the RBI’s rate cuts and open-market bond purchases, he wrote.

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