Surge in Global Yields to Keep Indian Bond Markets Circumspect

Emerging global risks will keep the domestic debt markets on the defensive and limit gains, given that Indian corporate bond spreads have already narrowed to near a one year low, says India Ratings and Research (Ind-Ra). The agency believes that an uptick in global yields and several upcoming high-impact events globally will limit the softening of domestic bond yields and keep the rupee volatile. Indian corporate bonds are in a sweet spot presently (generic one-year bond spread over Government securities (G-sec) averaged at 37bp in October 2016, while five-year spread averaged 39bp* -lowest in 2016)- limiting the scope for incremental outperformance from hereon. The focus for the Indian DebtFX markets will shift from the Reserve Bank of India's (RBI) accommodative monetary policy to two major drivers: (1) global developments and consequent risk appetite (2) incremental G-sec purchases through open market operations (OMOs).

Surge in Global Yields Signals Caution, Rupee to be Conduit of Transmission

The scope for G-sec yields to soften incrementally is limited, as globally government bond yields inch higher. The narrow spread between G-sec and developed market yields will keep the domestic debt market circumspect, as globally, economies brace for a potential reversal in yields from the June 2016 lows. Central banks of major developed economies expanded their monetary policies, as the countries battle deflationary pressures amid the fragile growth outlook. The low-rates phenomena pushed global bond yields to multi-year lows in June 2016. However, as central banks are left with fewer policy tools, the need for fiscal support has resurfaced. This has unsettled global bond investors - leading to a sharp surge in government bond yields.

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