Of the total investment limits in the general category, foreign portfolio investors (REITs) now hold around 17% of corporate bonds and 24.5% of sovereign debt, according to data from Clearing Corp of India and Bloomberg and compiled by ETIG. Ownership thresholds this low have not been seen in at least the past 15 years, according to the ETIG analysis. REITs had exhausted the entire sovereign bond holding limit on January 8, 2018. For corporate debt, the limit had reached around 96%.
“The narrowing yield spread and falling rupiah triggered REIT outflows from local debt securities,” said Ajay Manglunia, MD and Head of Investment Grade Group,
“With yields soaring in the US, UK and other developed economies, the flow is unlikely to return any time soon. high local yields,” Manglunia said. Aggregate investment limits for corporate bonds are now set at Rs 6.68 lakh crore, data from NSDL, a custodian, showed.
International investors had exhausted the entire limit more than five years ago – on September 4, 2017. “REIT inflows, when they pick up, would help keep yields in check in a low interest rate cycle. upside, reducing the pace of peak funding costs,” said Mahendra Jajoo, CIO – fixed income, Mirae Asset Investment Managers. Over the past two weeks, the yield spread between 10-year U.S. Treasuries and India’s benchmark has hovered between 3.25 and 3.32 percent. Such levels were last seen in June-August 2009, coinciding with the collapse of Lehman Brothers.” India will have to compete with other emerging markets such as Brazil, where bond yields are higher amid lower inflation and a relatively stable currency,” Jajoo said.
Brazil’s benchmark bond yield offers around 11.85%, with its currency gaining 9% against the US dollar this calendar year so far. In contrast, the rupee lost around 10% over the same period, according to Bloomberg data, although the Indian currency performed better in relative terms than the pound and yen.
Brazil’s central bank left its inflation outlook for this year unchanged at 5.8%, fueling expectations that a cycle of rate easing will begin next year.
Certainly, long-term investors, such as insurance companies and pension funds, have helped generate good demand for local bonds. “Volatility in global macro conditions and narrowing yield spreads have reduced REIT appetite,” said Soumyajit Niyogi, director, India Ratings. “India’s inclusion in the global bond index will create space for them. However, local yields need to be recalibrated to regain their attractiveness.”
The benchmark bond yield fell as low as 7.1% in the second week of September from a peak of 7.47% in the fourth week of July, when it was expected to that Indian bonds be included in the JP Morgan bond index.
The gauge, however, erased the gains after a decision on India’s inclusion was postponed.