10-Year Yield Spikes Most Since August 2022
India's 10-year yield spikes the most in over a year on RBI plan to curb liquidity.
Mirae Asset Investment Managers’ CIO-Fixed Income Mahendra Jajoo joins in for discussion with BQ Prime's Mimansa Verma.
Mirae Asset Investment Managers’ CIO-Fixed Income Mahendra Jajoo joins in for discussion with BQ Prime's Mimansa Verma.
Transcript
00:00 We have RBI monetary policy today. We had RBI monetary policy today where the RBI kept its
00:06 report unchanged. It was more or less in line with what the market had expected, but there are
00:11 certain nuances due to which the Indian bond market reacted. And we have Mr. Mahendra Jaju,
00:19 CIO of Fixed Income at Mirai Asset Investment Managers, joining us here to tell us more about
00:27 what is expected in the market and what leads to this volatility in the Indian bonds. Hello, sir.
00:35 Sir, the Indian bond yields had risen to 7.35, which is around 12 to 15 basis points from the
00:45 last close. So, what is it that is driving the Indian bonds market right now? Because
00:52 of late we have seen a lot of volatility in the market. So, what is it today that has led to such
00:59 a spike in yields? So, as you mentioned at the beginning that the Reserve Bank kept the policy
01:05 rates unchanged. However, there was one little announcement about the possibility of the open
01:12 market corporations on the sales side, which means the Reserve Bank could potentially consider
01:17 selling the common bonds to the market in case they need to manage the liquidity and if the
01:24 global environment becomes a little more adverse. And I think that is what has affected the bond
01:30 prices today in anticipation of the additional supply from the Reserve Bank. The market has
01:36 reacted on the lines that you said where the bond yields have gone up. You will recall that
01:43 prior to the policy, the global bond yields had gone up significantly. In the last two weeks,
01:49 the 10-year yield in US has gone up by about 60 basis points to close to 4.75, which is almost
01:57 a 15-year high. However, our bond yields had not reacted because the market was expecting a little
02:03 bit more dovish guidance from the Reserve Bank, which has not been the case. So, there is also
02:08 an element of little bit of catching up with the global yields at this point. So, I think combination
02:14 of the indications of a possibility of the open market sales as well as the catching up with the
02:20 global yields is leading to the reaction in the market today. Okay. Okay. Sir, if you could just
02:28 elaborate this for our viewers that how much of because RBI Governor said that the spike in bond
02:35 yields, our bond yields is not related to external factors and it is not linked to the US bond yields
02:43 shooting up. So, if you could just explain it for our viewers that how strong is the linkage between
02:49 US bond yields and Indian bond yields? And if not, then just what is the way ahead that is going to
02:59 be for India? So, see, there is a short term time frame and there is a longer term time frame. India
03:08 is a large economy today. We are the fifth largest economy in the world and we are a major participant
03:16 in the global trade environment. We are one of the largest importer of crude oil and we are one of
03:24 the largest exporter of the IT services. Therefore, what happens in the global market is bound to have
03:31 impact on India. We also run a large current account deficit and therefore we need large
03:37 capital flows every year to balance our account on the capital side and therefore I think in the
03:43 long run the domestic policy has to be in sync with the global policy. It does not have to be
03:50 exactly the same. For example, right now as the governor rightly said that today's increase in
03:56 the bond yields is not related to the global environment. What I mentioned also was that
04:02 today the RBI gave an indication of a possible open market sales to manage the liquidity,
04:10 the durable liquidity and that had led to this reaction in the market. However, in the prelude
04:16 to the policy today there has been a sharp rise in the government bond yields across the globe
04:22 and that may have also led to the decision from the Reserve Bank in terms of initiating this
04:30 guidance about the open market sales. So, the things are not linked one-on-one, things are not
04:36 linked on a day-to-day basis. What I meant to say is that directionally the things have to move in
04:42 the same direction to the extent there is a common interest and overlapping of interest between India
04:48 and the global economy. However, India has its own domestic strength. We have a large forex reserve,
04:55 we have a very moderate inflation, we have a very proactive central bank which has guided us
05:01 so nicely through the COVID disruption and then through the geopolitical disruption caused by the
05:09 conflict between Russia and Ukraine. So, therefore, our central bank has demonstrated
05:15 in the last couple of years that there is no one-to-one correlation but at the same time
05:21 at the macro level there is a certain amount of synchronisation with the global policy. So,
05:27 that distinction has to be borne in mind in the context of understanding the governance.
05:34 Okay, fair enough, sir. So, if you could give a level that the traders and the market should
05:40 watch out for because there should be, it's a 15 basis point hike today, it's the largest single
05:46 day jump since August last year. So, what is the level that we should watch out for in the coming
05:53 months or coming days? 7.35 is what I believe the current bond deals are at.
06:01 Yeah, so generally I think when a big event takes place it is not very wise to start taking
06:11 such an early pre-emptive call as to where it will stop because we have to see how the market is
06:16 positioned, how much unwinding happens, what is the extent of the open market sales that the reserve
06:22 bank does, whether the securities that are being offered in the open market operations are short
06:28 dated or long dated. So, there are a lot of factors which will go into deciding. So, ideally as I said
06:34 it is too early to take a call as to where it will stop but just from a pure reference point,
06:42 last year when the situation was very difficult, there were a lot of uncertainties, Fed had just
06:47 started hiking rates, we saw the 10-year yield peak at 7.60 and in the last one year I think it
06:54 happened sometimes around the same time last year, about 12 months back. In the last 12 months we
06:59 have not seen that level again and there was one occasion in March I think when the 10-year yield
07:04 just about hit close to 7.5 but then it retraced back. So, I would say that somewhere between 7.5
07:10 to 7.60 is a very strong resistance that we should observe and that's where possibly we can review
07:19 whether the levels are going to go higher from here or settle there and find some support in
07:25 terms of the buying by the investors. Sir, coming to the JP Morgan bond inclusion,
07:32 we had seen a lot of volatility there as well, bond yields had come down but it again started
07:39 rising. The market reaction was not as big as people were expecting. A part of it is also
07:46 because JP Morgan bond inclusion has been in the conversation for a long time so it must have been
07:53 factored in as well. But what is the dynamic in the market right now, what are people talking
08:01 about, what is the way ahead because we have our borrowing calendar released already. So,
08:07 what is the way ahead for the Indian bond markets?
08:14 So, if you look at the inclusion of the bonds in the JP Morgan index on a standalone basis,
08:21 it's an extremely positive development for India because obviously there will be a lot of
08:26 FPI flows on the debt side over a period of time and then it's not just only JP Morgan
08:34 but going forward we would like to believe that even the bigger indices players like Bloomberg
08:41 and Buckledge will also actively consider including the Indian government bonds into
08:47 their respective indices. Also, there is a certain amount of risk aversion as far as Russia and China
08:54 are concerned. So, there is a lot of vacuum which has to be filled up and India is the best country
08:59 to fill up that vacuum and therefore I believe that that will also expedite the inclusion of
09:06 the Indian government bonds to those indices. But even if you look at JP Morgan index,
09:13 the first instance of the bond flow will happen maybe in June-July 2024 which is 9 to 10 months
09:21 away and then over a period of time it will happen slowly over a period of 10 months. Therefore,
09:27 while that is very positive, the immediate action in the market is also governed and guided by the
09:34 overshadowing events. So, the global crude prices going up in the last two weeks and then correcting
09:41 or the global bond is touching the highest since the global financial crisis or the impact it might
09:51 have on India's current account deficit and the capital flows if the equity markets show some
09:59 kind of turbulence, those are the immediate factors that then overtake that use and therefore I think
10:06 we have to distinguish again between a long-term positive on the margin and the immediate factors.
10:12 So, that's where I think that in spite of that such a positive development,
10:17 we have seen the bond rates go up because of the immediate factors which concern the market.
10:24 Okay, thank you so much sir for taking out time to be with us here today. Thank you so much.
10:30 Thank you, my pleasure.
10:32 Thank you.
10:41 [BLANK_AUDIO]