India, US 10-year bond yield spread falls back to 14-year low

By Dharamraj Dhutia

MUMBAI (Reuters) – The spread between Indian and U.S. government bond yields has fallen below 300 basis points (bps) for the first time in 14 years, as local yields have held their ground in recent sessions and not reacted much to the spike in their U.S. counterpart.

The spread between the two eased to 290 bps, a level similar to June 2009, dropping from 320 bps two weeks ago.

The spread had hit a 14-year-low in May, shrinking to around 315 bps.

Lower yield differential will make Indian bonds unattractive to foreign participants, traders said.

“If U.S. rates stay here, the hurdle for money to move outside developed markets will be higher, so we are unlikely to see any significant interest from foreign investors in fixed income (markets),” said Ashhish Vaidya, managing director and head of treasury and markets at DBS Bank India.

Foreign investors’ net purchase of Indian bonds stood at 57 billion rupees ($688.30 million) between June-August, nearly half of the purchases seen in the preceding three months, data from Clearing Corp of India showed.

U.S. yields have been rising on expectations of interest rates remaining higher for longer but a similar rise in India has been averted as no further rate hikes are expected.

The 10-year U.S. yield has risen 35 bps over two weeks to 4.30%, while India’s 10-year bond yield is up only 5 bps at 7.20%, in the same period.

The Federal Reserve has raised rates by 525 bps since March 2022 while India has only seen 250 bps of hikes. Fed chief Jerome Powell’s Jackson Hole speech on Friday is now keenly awaited for further direction.

Traders anticipate spread compression to sustain over the next the few months term with continuous upward pressure on U.S yields.

Heavy debt supply would pose bigger headwinds for U.S. bonds, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

The demand-supply picture for local bonds seems to be favourable, which could see the benchmark bond yield topping around 7.25%, he added.

($1 = 82.8129 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman)