Bond Veteran Makes Contrarian Bet India Yields Will Decline
Investors predicting India’s bond yield curve to steepen further are probably reading it wrong.
(Bloomberg) -- Investors predicting India’s bond yield curve to steepen further are probably reading it wrong.
That’s the view of Jayesh Mehta, a veteran trader at Bank of America. He thinks the record $88.5 billion of bond purchases by the central bank this fiscal year and a further cut in interest rates will tamp down the curve’s steepness from near a decade high, pushing down yields on the most-traded 2029 notes to 5.50%, the lowest since 2009.
“We are of the view that there will be softening of yields,” Mehta, India Treasurer at the bank, said in an interview. “In the next six months, we see the overall yield curve being lower.”
The gap between the 2029 notes and two-year debt was at 137 basis points on Monday after widening by the most since 2010 in May. IDFC Asset and FirstRand Bank are among investors who expect the curve to steepen further amid a record 12 trillion rupees ($159 billion) of debt sales by the government this year.
“Yields can be much lower than what we have right now,” Mehta said, adding that he’s bullish on the 12-15 year segment of the curve “because we see interest rates going down further by 25 to 50 basis points.”
For Mehta, the 30-year bond veteran, going against the crowd and winning isn’t new. In October, he correctly predicted 10-year yields will fall below 6%, compared with a consensus forecast of 6.45%, by the end of the fiscal year this March. In early 2019, he forecasted the RBI would ease before the central bank slashed rates by 135 basis points; he got the call right in 2017, too.
Bank of America Securities expects the RBI to purchase $88.5 billion of bonds in the fiscal year that began April 1. It has so far bought 1.2 trillion rupees of debt and repeated assurances of support. That’s helped the yield on the 2029 notes decline more than 50 basis points since end-January despite the government’s record borrowing program.
On Monday, the yield fell one basis point to 6.01% after the minutes of the RBI’s most-recent monetary policy meeting showed that authorities are prepared to provide more stimulus to buoy the economy.
“Over the last few months, the central bank’s actions and the Governor’s ‘whatever it takes’ assurance is giving confidence to the market,” Mehta said. The market believes that “if some stress builds up, the RBI will come and support it,” he said.
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