A surge in the dollar index and the temporarily diminishing appeal of emerging market assets continue to pressure yields.
September saw record lows after the US Federal Reserve delivered a hefty 50 basis point rate cut, causing a softening of US Treasury yields, along with milder domestic bond yields and a stronger rupee. During September US T-bill yields saw a low of 3.64%.
Two months later, in early November, US yields rose to 4.48%, due to safe-haven dollar demand after pro-tariffs Donald Trump won the US presidential elections. A rise in US bond yields makes assets in emerging markets like India less attractive, causing domestic bond yields to surge.
“There is a general risk-off happening across all emerging market assets due to Trump being reelected and a flare-up in the Russia-Ukraine war. Plus October inflation has been higher, and the print for next month (November) is also expected to be higher. And with no policy easing in sight, yields have risen,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.
In October, the consumer price index (CPI)-based inflation reached a 14-month high of 6.21%, up from 5.49% in September, while food inflation was at 10.87%. CPI was above the comfort level of 2% to 6% for the RBI.”With inflation beyond the comfort of RBI, markets are expecting a rate cut in February or April, so bond yields will remain in a tight range till then. Elevated US yields will also put a floor on domestic yields,” said Vikas Goel, CEO of PNB Gilts.Along with rising bond yields, the Indian rupee depreciated to new lows in November, with a record low of 84.49/$1, as foreign portfolio investors sold heavily from Indian stocks and bonds. Foreign portfolio investors have provisionally sold $4 billion in November so far, and $11 billion in October, depository data showed. “With the rupee depreciating, all Indian bonds also have depreciated, causing investors to exit,” Pawar said.
“Most investors who invest in government securities have unhedged positions. So a depreciating currency will cause jitters,” said a financial markets expert at a private sector bank.