India’s maiden overseas bond sale couldn’t have come at a better time with yields tumbling globally.
A $10 billion issuance of sovereign notes by Asia’s third-biggest economy is expected to price at a yield premium of about 90 basis points to 130 points over US Treasuries, according to a Bloomberg survey of foreign and local investors. That’s in line with sales by countries with similar credit ratings such as Indonesia. The novelty of a debut offering may also support demand for India’s debt, analysts say.
India’s overall budget deficit is one of the highest in Asia, but that may not deter bond buyers desperate for extra returns at a time when about $13 trillion of global fixed-income assets, or around a quarter of the total, have negative yields. The deal will give global funds more access to Indian sovereign bonds, and may also let the country’s other issuers adjust debt sale prices based on the offshore sovereign bond as a benchmark.
“We think an Indian sovereign Eurobond issue would be very well received in today’s markets,” said Gregory Smith, fixed-income strategist at Renaissance Capital in London. “With US 10-year Treasuries yielding close to 2%, the search for yield continues, plus foreign investors would be looking to realize long-sought-after exposure to the Indian economy.”
India’s debt sale would follow a slew of sovereign issuance by emerging market countries this year. Indonesia sold 3.4% bonds due 2029 at 130.50 basis points over Treasuries in June, while the Philippines issued 10-year notes at 110 basis points in January. Russia sold 2029 dollar bonds at a 3.95% yield, and Saudi Arabia issued 2 billion euros of bonds due in 2039 at 140 basis points over mid-swaps.
“The very low and even negative yields in developed markets are indirectly positive for EM bonds,” and that’s likely to result in strong demand for India’s sovereign offering, said Jan Dehn, the London-based head of research at Ashmore Group Plc. India “continues to place barriers to foreign investors in the domestic bond market, so dollar bonds are a second-best way to express a view,” he said.
The South Asian nation’s regulators have capped holdings of sovereign debt by overseas investors, who are allowed to own only about 6% of total outstanding bonds, while peers like Indonesia and South Korea have no restrictions.
The announcement of the foreign-bond sale by the country’s Finance Minister Nirmala Sitharaman in the July 5 budget helped boost onshore sovereign notes as investors cheered the opening of a new avenue for the country to raise funds. The yield on benchmark 10-year bonds declined to the lowest in 2 1/2 years before paring some gains to trade at 6.46% on Wednesday.
The government is considering the issuance in U.S. dollar, euro, and yen, and details will be finalized as early as October, people familiar with the matter said.
But the proposed issuance has also come under scrutiny, with former central bankers and some independent economists criticizing the move, saying India’s general budget deficit and a wider current-account deficit could make the nation vulnerable during episodes of global swings.
The combined budget deficit of federal and state governments and state-run companies is about 8% of the gross domestic product. While the gap and growing stresses in the banking system are an area of concern, BNP Paribas Asset Management says Indian assets may still see good demand.
“Sentiment has been improving lately, and, India credit metrics are overall good and improving. So the issuance should attract interest from all institutional investors,” said Jean-Charles Sambor, London-based deputy head of emerging-market fixed income at BNP Paribas Asset Management.
India’s debt sale may also be a boon for local companies, who have already sold offshore bonds at a record pace of about $15.5 billion so far in 2019, according to data compiled by Bloomberg. Those firms may be able to offer overseas notes at a lower yield after the Indian sovereign deal, in line with past moves in other markets, including China.
“The maiden bond issuance will create a benchmark for Indian companies to raise cheaper money abroad,” said B. Prasanna, group head- Global Markets –Sales, Trading and Research at ICICI Bank Ltd. “Given that it will be India’s maiden sovereign issue, we feel that it will command scarcity premium in the global market.”