Falling Global Bond Yields: Does India Stand To Benefit? 

Indian government bond yields, which remained stubbornly high despite interest rate cuts announced by the monetary policy committee, have finally seen a decline in the last three weeks because of a confluence of global and domestic factors.

The 10-year benchmark bond yield has fallen 28 basis points since May 10, when it traded at 7.41 percent. On Thursday, yields were trading at 7.13 percent, a basis point higher than its previous close of 7.12 percent. Bond yields and bond prices move inversely.

Hopes of easier liquidity conditions and another rate cut from India’s monetary policy committee are the local factors that have brought down yields. In the last few trading sessions, the fall in global bond yields helped pull yields down to the lowest level in nearly 18 months.

The benchmark U.S. 10-year bond yield has dropped from 2.42 percent on May 21 to 2.27 percent on Wednesday. Indian bond yields mirrored this drop.

Bond yields are coming down globally and this is putting downward pressure on India bond yields too, K Harihar, treasurer at FirstRand Bank, told BloombergQuint. He added that oil prices have also remained below $70 per barrel, which helps ease any fears of pressure on the Indian currency and higher inflation. These factors have added to the positive sentiment generated by the recent general election results and the hope that domestic liquidity conditions will now ease, Harihar explained.

High Real Yield

Compared to developed markets, bond markets in emerging economies still offer a high real yield.

For instance, in India, despite the recent decline, the real yield offered by the Indian 10-year bond is about 3.63 percent. The real yield is calculated by using the nominal yield and the expected inflation, taken at 3.5 percent. In contrast, the real yield in many developed economies is much lower, in some cases, close to zero.

This increases the attractiveness of Indian bonds even in a risk-averse scenario. As a result, foreign portfolio investors have been net buyers of Indian bonds in May after selling in April, shows data from Bloomberg.

Indian bonds were anyway attractive and now with the Narendra Modi government coming back to power, Indian debt is looking more attractive, said Lakshmi Iyer, chief investment officer-debt at Kotak Asset Management Company. The fall in global bond yields has further boosted bond prices and brought down yields, she said.

The Signal In Global Bond Yields

While lower global bond yields may benefit India in the short term, the underlying signal of weaker global growth is anything but positive.

A key reason behind the recent fall in U.S. yields has been the concern that U.S.-China trade tensions could worsen the outlook for the global economy. This has led to a flight of safety to the bond markets.

This week, the spread between 3-month and 10-year yields was at its most inverted since 2007, intensifying signals pointing to a recession, Bloomberg News reported. A yield curve is said to be inverted when the yield on longer-dated securities is below that on shorter-term bonds. Such a scenario suggests that investors are expecting weaker growth, which, in turn, could lead to lower interest rates in the economy.

It is not just U.S. bond yields that are falling. Germany’s 10-year bund yield fell to the lowest level in three years and the 10-year Japanese bond yield is at a multi-year low.

“The geopolitical situation is getting even more complicated and this could have its implications for global growth,” said economists at IDFC First Bank in a report on Monday. Earlier this month, the OECD revised down its forecast for the global growth to 3.2 percent for 2019 from 3.3 percent previously, on the back of trade tensions taking a toll on global growth momentum.