India’s benchmark bond yield jumped above 8 percent last week for the first time in three years. Even that isn’t enough to lure back some of the world’s biggest money managers.
While valuations appear attractive, risks from higher oil prices, rising debt supply and a weakening currency are among reasons Pacific Investment Management Co. and Schroder Investment Management Ltd. say they’re wary of adding to holdings in Asia’s highest-yielding major market.
“Higher oil prices are a key negative risk for India, particularly on inflation and the current-account deficit,” said Roland Mieth, Singapore-based emerging-market portfolio manager at Pimco, which oversees $1.8 trillion globally. “We are cautious on both the rupee and duration in India. More clarity on the supply-demand arithmetic would make us reconsider our current stance on duration.”
The lack of appetite would suggest little or no respite for the rupee-bond market that has seen foreign investors exit at a record pace this year. The Reserve Bank of India raised interest rates last week for the first time since 2014, with a forward-looking survey showing the nation’s inflation problem is likely to worsen in the coming months on the back of higher oil prices.
Asset managers are concerned about the blow rising prices will deal to the oil-importing nation’s current-account deficit and its currency, which is already among Asia’s worst performers this year. Add to that the risk of a potential worsening of public finances amid bets the government will boost spending to woo voters ahead of next year’s national elections.
“We still think there is some more volatility to go before adding meaningfully to our positions in Indian bonds,” said Manu George, fixed-income director at Schroder Investment Management Ltd., which oversees $604 billion. “The challenge still is that oil prices continue to hover at higher levels, which means that the currency can come under renewed pressure.”
India’s 10-year yield touched 8.03 percent on Friday, the highest level since May 2015, before reversing its advance to end the day at 7.95 percent. It was up four basis points at 7.99 percent on Monday, taking its increase for June to 16 basis points. The yield climbed 43 basis points in the previous two months.
The rupee climbed 0.3 percent on Monday to 67.3275 per dollar, paring its loss in 2018 to 5.1 percent.
While overseas funds are fleeing bonds, matters have been made worse by the continued lack of participation from local state-run banks — the biggest holders of Indian sovereign securities — who are unwilling to buy the debt after having suffered billions of losses on their investments.
While the “pace and direction of India’s reform continues steadily in a positive direction, we are looking for weakness to add” to holdings, said Lin Jing Leong, a Singapore-based investment manager at Aberdeen Standard Investments, which oversees about $400 billion.
Such weakness “in the near term will be driven by higher inflationary pressures into July and the current demand-supply mismatch that is ongoing as nationalized banks stay out of the market,” she said.