Bonds set to end year on a high; Pimco may raise holdings of rupee debt

The New Year promises to bring more gains for the sovereign bond market, which has rallied hard and broken a five-quarter losing streak to end 2018 on a high.

Pacific Investment Management Company (Pimco) says it may raise its holdings of rupee debt, which has topped returns among major emerging Asian markets in the second half of the year. Some analysts predict the benchmark 10-year yield to drop below 7 per cent to levels not seen since November 2017, as rising bets for interest-rate cuts add more legs to an advance spurred by falling oil prices and the central bank’s bond purchases.

 “We are bullish on Indian bonds and find the current levels quite attractive to add,” said Roland Mieth, Singapore-based emerging-markets portfolio manager at Pimco, which oversees about $1.7 trillion. 

“Supply-demand dynamics have become positive and inflation remains under control. We also think the RBI is going to be dovish going forward after the appointment of Governor Shaktikanta Das.” 

Das stoked speculation of rate cut just hours after taking the job earlier this month, saying inflation was “benign” and emphasising that supporting economic growth was within the RBI’s ambit. Benchmark yields and one-year interest-rate swaps plunged following the comments, with the latter now down 100 basis points from a three-year high in early October, indicating that traders are placing bets on easing.

A late-2018 plunge in oil, the biggest bugbear for Indian assets for much of the year, helped drive consumer inflation to a 17-month low, and put local-currency debt back on global investors’ buy list. Foreign funds have poured $1.3 billion into rupee bonds since the start of November after being net sellers in the previous two months.

“We like India, Indonesia and China, in that order,” Mieth said in an interview in response to a question on Asian emerging-market sovereign bonds. India's "inflation remains fairly limited. We want to remain in the liquid part of the market and in India it means five-seven year part of the curve," he said.

The yield on India's benchmark 10-year bonds may drop to 6.9 per cent by the end of March, according to Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership in Mumbai. 

The yield has plunged more than 70 basis points since September 30 to head for its biggest quarterly slide since 2008. It rose in each of the previous five quarters. The yield on the 10- year bond was up 2 basis points to 7.30 per cent on Monday.

"The outlook on government bonds is bullish," said Sandeep Bagla, associate director at Trust Capital Services in Mumbai. "Bond yields will further trend lower as slowing inflation translates into lower interest rates, though one caveat is that Brent prices should remain around the current levels."

Bagla predicts the 10-year yield drop to as low as 7 per cent by April. 

The RBI, which has since May been injecting liquidity via its open-market debt purchases to fight a cash crunch, last week extended such support by raising the amount of bonds it plans to buy in the coming days. That’s seen as another trigger for a rally into 2019.

“The RBI’s OMO buying is the biggest factor behind the rally in bonds,” said Amandeep Chopra, head of fixed income at UTI Asset Management Company in Mumbai. 

The purchases are expected to keep the market supported at least till the end of March, he said.

Upbeat 

• The sovereign bond market has rallied hard and broken a five-quarter losing streak 
• Analysts predict the benchmark 10-year yield to drop below 7 per cent to levels not seen since November 2017
• Supply-demand dynamics have become positive and inflation remains under control, maintains Pimco