Bonds market may remain choppy, but yields turning attractive

10-year benchmark bond slipped to 9.4% as foreign investors withdrew from emerging markets for developed markets, like US

Rising yields on US treasuries has seen domestic bond yields surge. Fund managers say yields are getting attractive. 

 

The 10-year benchmark bond slipped to 9.4% as foreign investors withdrew from emerging markets for developed markets such as the US. The 10-year g-sec is trading at 9.23%. 

 

Experts reckon that the 10-year benchmark bond yield will remain volatile as the difference in the bond yields between India and the US has been narrowing. US yields are expected to rise further as the US macro economic numbers are showing signs of improving and the Fed is expected to taper its bond buying program. 

 

The US 10-year bond yield has risen sharply since May 2013 from 1.79 to the present 2.8%. India's 10-year bond yield is now around 9.2%. The yield differential between US and India 10-year paper is aroud 6.3. This yield differential has been around 6-6.5% for most of last year before the volatility began. 

 

Says Dwijendra Srivastava, head of fixed income, Sundaram Mutual: “The hedging cost has an implication in the short term and it has gone up in the last few months. Our market has gone a range higher because the dollar yields are higher.” 

 

Long term bond funds fell by nearly 7.5% in the last month as per data by Value Research. Bonds NAVs take a hit when bond yields rise, and vice versa. 

 

The Indian macro numbers are also impacting bond yields and experts say that countries with a large current account deficit across the globe are facing similar problems. Countries such as Brazil and Indonesia also are seeing their currencies correct against the dollar. 

 

Says Srivastava: “Countries that are running a current account deficit are bearing the brunt and tapering will definitely have an impact. But at some point one will have to see the potential yield in the bond market.”

 

At the current levels bond yields are at multi-year highs, and experts feel that yields are turning attractive now. In the past year, bond yields hovered in the range of 8-8.2% for a very long time before foreign investors began selling Indian bonds. The yield on the 10-year g-sec is 100 basis points higher than August 2012.