Foreign banks dump $3 billion worth g-secs amid India-Pak tensions

Synopsis

Traders believe the 10-year benchmark is likely to settle near 6.32-6.34%, following the recent border de-escalation and ceasefire announcement.

Mumbai: Foreign banks and primary dealers dumped nearly $3 billion worth of Indian government securities over Thursday and Friday amid escalating India-Pakistan tensions. But traders expect them to return as geopolitical risks showed signs of cooling over the weekend, likely lowering yields by 4-5 basis points Tuesday.

Traders believe the 10-year benchmark is likely to settle near 6.32-6.34%, following the recent border de-escalation and ceasefire announcement.

They said the sudden selling last week was driven by concerns of a wider military conflict after cross-border strikes intensified, triggering a rush to pare exposure to risk assets. The 10-year benchmark yield had spiked nearly 10-12 basis points recently.

While there was sharp movement in G-sec yield last week, it was not primarily due to foreign investors pulling out and trader positioning in response to geopolitical uncertainty only but also responding to the US yield movement. This has caused a pullback in yields from the recent highs around 6.44% toward the previous consolidation zone 6.32-6.34%.

Global cues, especially US Treasury yields rising 70-80 basis points over a few days, are also influencing India's fixed income market.

"The 10-year yield may cool off temporarily to the 6.32-6.34% levels due to the ceasefire and position unwinding, but that's just a knee-jerk move," said Ashhish Vaidya, managing director & head - Treasury & Markets, DBS Bank India. "The broader short term tone remains cautious, with upward pressure persisting unless global yields, especially in the US, begin to ease meaningfully, which will likely set the trend for making the Em debt more attractive."

Yields on 10-year G-sec, which was at 6.3% on 23 April has risen 6.44% at the end of last week.

In the longer term, if RBI cuts the repo rate to 5.50%, experts say, yields could fall to 6%, offering investors who entered at 6.40%-6.44% a potential gain and additional returns, higher than earlier estimates.

"There have been de-escalations on the border and a cease fire, so I do expect bond yields to soften by about 4 basis points on Tuesday and I am expecting yields to close at about 6.33%," said Mataprasad Pandey, vice president, Arete Capital Services. "I had given an investment call on Thursday when yields went up to 6.44% to 'buy.'

In the longer term, Pandey said that assuming RBI cuts rates to a terminal repo of 5.50%, yields will likely fall to 6%. In such a scenario, investors who bought when yields were at 6.40-6.44% would see more capital appreciation.

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