India bond yields to decline further over global tensions, say dealers

With the bond yields in Europe in a negative territory, and the market expecting more than one rate cut by the Reserve Bank of India (RBI), the Indian bond market is at the midst of a great rally, with some more legroom to go.
 
The 10-year government bond yield fell to 6.84 per cent, recovering a little from Tuesday’s 6.81 per cent. On Monday, the yields had closed at 6.93 per cent. As yields rise, prices of bonds fall and vice-versa.
 
The bond market participants see the yields falling by another 15-20 basis points from the present level.
 
Government bond prices shot up in Eurozone on Tuesday after European Central Bank Chief Mario Draghi indicated that more rate cuts and bond buying could be in the offing to stimulate the economy in the face of trade war related uncertainties.
 
The German 10-year bund yield sank 7 basis points to a -0.32 per cent, French bond yield fell to a -0.02 per cent. Prices of bonds move the opposite direction of yields.
 
Meanwhile, the US 10-year treasury yield fell to a 21-month low of 2.017 per cent as the US Fed started its two-day meeting.
 
The Indian bonds also reacted to that global movement, and on continuation of ease money policy, which eventually should find its way into emerging markets assets, such as those in Indian bonds and equities.
 
In terms of global uncertainties, such as trade tensions between the US and China, money flows into bonds. This is positive for the bond market, which is facing constant supply pressure. The yields are poised to fall even further.
 
“With global uncertainty currently getting front-loaded with every passing day, and a weak domestic growth outlook, yields are likely to decline from current levels, reflecting weak real economic activity. Empirical evidences do suggest such movements in Indian context,” said Soumyakanti Ghosh, chief economic advisor at State Bank of India.
 

A weaker economic growth and falling yields would mean fall in interest rate as a whole. Policy rate transmissions are happening now at a faster rate than before, RBI Governor Shaktikanta Das said in the post-monetary policy conference in early June. With stress on providing ample liquidity in the system, the rate transmission could be even faster.
 
“If liquidity is in surplus and bond yields fall to 6.5 per cent level, then transmission will automatically happen,” said Jayesh Mehta, head of treasury at Bank of America Merrill Lynch.
 
According to the head of treasury of another private sector bank, the falling growth demands sharper rate cuts by the central bank, particularly at a time when inflation is under control.
 
The market has already factored in one rate cut. But, if there are two rate cuts, yields can fall to 6.5-6.7 per cent, said the treasurer.
 
A lot depends on the continuity of flows from the foreign portfolio investors. And that happens when the local currency is stable.
 
“FPIs always look for risk-adjusted currency return. If the currency is stable, it will attract more capital. The positive thing about India now is that it has a stable government, which ensures policy continuity, and a low inflation. This somewhat lends stability to the currency, which is good for portfolio flows,” said Ramkamal Samanta, head of debt and fund manager at Star Union Dai-ichi Life Insurance.