No­mura says in­ter­ven­tion can snap bonds’ vi­cious cy­cle

Financial Chronicle - - MONEY GAME - KARTIK GOYAL

IN­DIAN bonds are caught in a vi­cious cy­cle and pol­icy mak­ers need to in­ter­vene to break that to pre­vent more losses, ac­cord­ing to No­mura Hold­ings Inc.

State-run banks—the big­gest hold­ers of lo­cal sov­er­eign debt—are largely stay­ing away, ow­ing to losses worth bil­lions of ru­pees suf­fered dur­ing a rout that has seen the 10-year yield rise in nine of the last 10 months. That’s at a time when sup­ply of gov­ern­ment bonds is ris­ing and for­eign funds are dump­ing ru­pee notes at a record pace.

“It’s in a way a self-sus­tain­ing sort of a vi­cious cy­cle that as banks re­frain from this mar­ket, bond yields go higher and as yields go higher, port­fo­lio val­u­a­tions gets sig­nif­i­cantly im­pacted, which fur­ther re­duces their ap­petite,” Neeraj Gamb­hir, Mum­bai-based manag­ing di­rec­tor and head of fixed in­come at No­mura’s In­dian unit, said in a phone in­ter­view. “This cy­cle needs to be bro­ken through some pol­icy in­ter­ven­tion.”

Gamb­hir’s call comes af­ter a slew of mea­sures failed to halt the rout. The cen­tral bank and the gov­ern­ment have al­ready eased some in­vest­ment rules for for­eign­ers, pared debt sales and al­lowed banks to spread out trad­ing losses. Yet, the yield on In­dia’s bench­mark 10-year bonds has climbed 58 ba­sis points since the first such pol­icy change was an­nounced in late March.

The 10-year yield rose above 8 per cent last week as the Re­serve Bank of In­dia raised bench­mark in­ter­est rates for the first time since 2014 and set the stage for a grad­ual tight­en­ing cy­cle. It fell two ba­sis points to 7.91 per cent on Thursday. A com­bi­na­tion of ris­ing oil prices, tighter do­mes­tic liq­uid­ity and wors­en­ing pub­lic fi­nances has cast a pall over bonds in the past year. “Whether that pol­icy in­ter­ven­tion is by way of the RBI buy­ing bonds through open­mar­ket oper­a­tions or it’s the gov­ern­ment tak­ing some steps to en­cour­age de­mand from out­side or from the do­mes­tic mar­ket, that needs to be seen,” said Gamb­hir. “But un­less and un­til we find some other source of de­mand for gov­ern­ment bonds, the stress in the gov­ern­ment bond mar­ket will prob­a­bly con­tinue for the fore­see­able fu­ture.”

In­vestor con­fi­dence has also been dented by weak­ness in the ru­pee, which is among Asia’s worst-per­form­ing cur­ren­cies in 2018.

Whether the 10-year yield “set­tles at 8 per­cent or 8.25 per cent is just a mat­ter of de­tail, but I don’t see any respite at this point in time,” said Gamb­hir.

Here are some other com­ments he made dur­ing the in­ter­view:

“At this yield level, buy­ing gov­ern­ment bonds is more at­trac­tive than lend­ing money to even re­tail port­fo­lios. So, there is clearly a lot of value in the gov­ern­ment bond curve. But the prob­lem is that it’s not about the value. It’s about the buyer base, it’s about de­mand”

“I don’t think the staterun banks will start com­ing in and buy­ing bonds at 8%, think­ing, now there’s a lot of value. I don’t think it’s the value that’s driv­ing their de­ci­sion be­hav­iour”

There are many vari­ables at play at this point in time. The mar­ket will re­act to global fac­tors, en­ergy prices, crude oil prices, in­fla­tion out­come and the mon­soon rains

“Short-end bonds of­fer a lot of value. And also given that we are in a ris­ing yield en­vi­ron­ment glob­ally, du­ra­tion is not some­thing in­vestors are likely to like too much at this point in time. But if you look at it from a pure risk-re­turn ba­sis, twoto-three year bonds are to­day of­fer­ing a de­cent value”

In­dia may cut down on is­suance of shorter-ma­tu­rity bonds, a se­nior gov­ern­ment of­fi­cial said, as a drop in prices on the se­cu­ri­ties in the sec­ondary mar­ket prompts in­vestors to de­mand higher yields at auc­tions.

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