Bond investors book profits after yields fall

Indian bond traders are booking profits after yields fell more than 30 basis points since the Brexit referendum, but the rally could be just nearing its end.

The yields on the 10-year bond fell to its May 2013 low of 7.13 per cent, prompting investors to book quick profits. The yields retreated from those levels to close at 7.17 per cent on Tuesday, but continue to be attractive for investors. In the last few years, bond yields have remained high despite rate cuts by the Reserve Bank of India. As yields fall, prices of bonds rise.

The market is of the view that the yields could just touch the 7 per cent level. Beyond that, it could be difficult as inflation continues to remain high, touching almost 6 per cent. The system is awash with liquidity and banks are parking their excess money with the RBI at a paltry 5.5 per cent, the reverse repo rate.

The 91-day treasury bills have fallen to 6.5 per cent, same as call money rate and at a time when credit growth is still sub-10 per cent, banks are finding it comfortable to invest in treasury bonds and earn a percentage point more than what they would have earned if they just parked their money with the central bank.

But the biggest factor driving the market right now is the huge inflow by the foreign portfolio investors. The easy money stance adopted by the global regulators and the decision to postpone interest rate hike by the US Federal Reserve. "FPIs are riding on easy money globally and have refocused on high yield offering emerging markets. The soft yields in the US market is forcing them to maximise their returns and India looks very attractive," said Harihar Krishnamurthy, head of treasury at First Rand Bank.

Net of sales, FPIs invested Rs 7,000 crore in July this year - the highest single monthly flow ever in the debt segment. Similarly, in equity segment also, they remain bullish, pumping in an additional Rs 11,340 crore in July alone.

The inflow of dollars is strengthening the rupee even as the RBI is busy mopping up the inflow to boost its reserves, which now stands at about $363 billion.

According to a senior executive of a FPI present in India, the bond investors are booking profits and most of the fund houses and banks have witnessed double digit profits in their treasury portfolio because of the fall in yields.

Krishnamurthy expects the yields to remain soft till September, as monsoon has panned out well and goods and services tax could also get passed by the Parliament this week.

But India Ratings Associate Director Soumyajit Niyogi sees the yields to consolidate around the present level.

"The rally in domestic bond market is more of tactical than any incremental changes in fundamental. Rather, monthly inflation number has been surprising heavily, and Global condition after Brexit has recovered more than expected at least in short term," Niyogi said, adding, the yields could "settle down here and could consolidate."