JAKARTA / NEW DELHI, October 2 (Bloomberg): Sovereign bonds of India and Indonesia appear better positioned to withstand the impact of rising US yields thanks to their larger rate differential against bills of the Treasury.
Bonds from both countries are already leading gains in emerging Asia this quarter, offering yields of 3% to 5% to dollar-based investors. In comparison, low yield bonds from Thailand and South Korea posted losses of between 4.5% and 5%.
The Treasury rout spurred by the Federal Reserve’s hint that it could start cutting bond purchases in November intensified amid challenges for President Joe Biden’s administration to raise the ceiling on the debt.
The ensuing wave of global bond sell-offs weighed on Asian bonds, with hawkish comments from UK and Norwegian central banks adding to the nervousness.
Indonesian and Indian bonds outperformed due to their wider spread to Treasuries, lower inflation rates relative to their emerging market counterparts, positive fiscal developments and the bank’s bond purchases central, said Siddharth Mathur, head of emerging markets research for Asia-Pacific at BNP Paribas. HER. “We expect these trends to remain intact until the end of the year.”
The 10-year bonds of the two countries have a buffer of around 470 basis points each against T-bills of similar maturity. Despite recent moves, the spread is close to a five-year average for rupee bonds while it has narrowed by an average of 515 basis points for rupee debt.
The premium offered by won and baht bonds is around 70 basis points or less on similar banknotes, making them more vulnerable to fluctuations in the Treasury.
Indonesia has pledged to reduce the budget deficit to less than 3% of gross domestic product by 2023, while India this week stuck to its borrowing plan for the second half of the year. fiscal year ending March 2022.
India is also aiming to reduce its budget deficit for this fiscal year to 6.3% of GDP, half a percentage point lower than initially forecast, thanks to improved incomes, according to sources familiar with the matter.
A potential inclusion in global bond indices is seen as another positive catalyst for Indian bonds.
Foreign funds invested $ 3.3 billion in Indian bonds in the three months ending September, the highest number since the third quarter of 2017. Rupiah bonds saw a net outflow in the same period but robust onshore demand, following a reduction in debt supply and purchases by Bank Indonesia kept yields anchored.
Rupee bonds run the risk that the Indian Reserve Bank will tighten policy soon. The central bank drained liquidity from the banking system at a significantly higher rate on Tuesday after making its bond buying program liquidity neutral since last week.
The macroeconomic risk of a hawkish Fed still persists for rupee debt given that nearly 22% of the country’s sovereign bonds are held by foreign investors. Although this proportion fell by 39% in January 2020, it remains one of the highest among Asian countries. – Bloomberg