US tariffs a geopolitical event, could turn growth-negative but bond-positive: Prashant Pimple, Baroda BNP CIO

The fresh round of U.S. tariffs has moved beyond trade policy into the realm of geopolitics, according to Prashant Pimple, Chief Investment Officer – Fixed Income at Baroda BNP Paribas Mutual Fund.

He noted that while additional duties on India may weigh on growth, the slowdown could paradoxically turn out to be positive for bond investors, as softer growth tends to support debt markets.

However, he cautioned that fiscal pressures, higher state borrowing, and supply-demand imbalances are still pushing yields higher in the near term. Edited Excerpts -

Q) With the U.S. imposing new tariffs and global trade tensions rising, how are bond yields reacting, and what does it mean for fixed income investors?

A) US imposition of tariffs upto initial 25% is largely in line with what the US has done with some of the other nations. However, the additional 25% tariff imposed mainly due to the US alleging that India’s continuous buying of oil from Russia is funding the Ukraine War in a way, has become a pure geopolitical event.

Theoretically, the extra 25% Tariff if kept as it is, should be growth negative which in a way is positive for bond investors. The fixed investors by design should benefit if growth slows down on account of this event.

However, recently there has been other events impacting the bond yields negative such as GST rates tweaking, fiscal incentive desired by certain sectors impacted by Tariffs, slowdown in corporate taxes (all of these are fiscal negative), higher supply of SDLs and long Gsecs as a percentage of total borrowing without equally large demand from pension funds, insurance and banks and a neutral policy stance by the central bank- all of these has taken the bond yields higher.

We believe fixed income investors have an potential level to invest at this stage as when the dust settles down, the case for investment would be more fundamental as a) GDP growth remains at 6.5 centric level vs aspiration of 8% b) CPI is largely near target level and may benefit on account of GST reduction as well as any potential reduction in oil prices and c) Adequate liquidity with a neutral stance continue to indicate a pro growth mindset of the central bank which would mean there would be efforts to curb the yields from going further high as that would nullify the entire upfronting of rate cuts delivered earlier to ensure transmission of lower rates in the economy

Source: Bloomberg

Q) U.S. bond yields remain elevated—are we entering a “higher-for-longer” regime, and how should Indian debt investors position themselves?-
A) US bond yields have largely remained bound for past few months. On one hand, there is weakening labour market which justified rate cuts down the line, on the other hand there are fiscal problems and concerns of independence of the FED due to constant political intervention.

The curve has steepened recently on account of these reasons. We do think there is a fair chance for the yield curve to move lower first before eventually rising later.

What matters for Indian investors is that if the yield curve is headed lower in near future in US, coupled with more than possible weakening of dollar index, the FPI investors would be net buyers of Indian debt due to both currency difference and spread difference between the yields. This should be a fixed income positive in general for the India market.

Q) Japan’s long-term government bond yields have surged to multi-decade highs. How significant is this shift for global capital flows and risk sentiment?
A) This remains a risk to be monitored. Japan has gone through decades of low inflation, low-interest rate environment and hence a large part of Japanese Capital used to get invested in assets abroad.

In addition, the low-interest rate environment resulted in what is referred to as ‘yen carry trade’ supporting investments in ex-Japanese markets.

If the recent surge in Japanese inflation persists, then rise in Japanese interest rates cannot be ruled out. This can be a big negative in terms of capital flows ex Japan and remains a key macro monitorable

Q) Do you see rising developed market yields impacting foreign inflows into Indian debt markets, especially with India’s inclusion in global bond indices?.
A) We believe the case for investment in India is more fundamental given the growth inflation dynamic explained earlier. The recent upgrade and macro stability coupled with potential valuation of Indian rupee makes a decent case for investment

Q) For investors looking at fixed income, is it wiser to lock into long-duration bonds now or stay short given the uncertain global rate environment?
A) We believe investments into any category should be based on the asset allocation and investment risk appetite of the investors.

Given that, if any investor has long term money to be allocated in fixed income markets, then entering at the current level to lock in at near to 7.5% annualised level with only sovereign exposures presents a fairly potential investment opportunity

Q) How should investors balance between sovereign bonds, corporate bonds, and new-age fixed income products like private credit AIFs in the current scenario?
A) Current Mutual fund portfolio is a mix of sovereigns and corporate bonds, depending on the risk return profile of an investor a particular fund suits investor need.

Typically, mutual funds have mid duration portfolios concentrated in corporate bonds and duration strategies concentrated in sovereigns.

Q) Are inflation risks largely behind us, or could tariffs and supply-side shocks reignite yield volatility in the coming quarters?
A) Volatility will remain a subset of the journey ahead. Earlier it was on account of uncertainty of higher inflation, then there was necessity to curb rupee movement, thereafter there was upfronting of rate cuts and liquidity infusion with OMOs, then it moved to ‘neutral’ stance and supply-demand imbalances coupled with fiscal concerns.

Here onwards, it could be due to geopolitical developments, dollar index trajectory, development on oil prices, inflation composition change next year etc.

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