India’s bond market is experiencing a surge in activity. This surge was triggered by the inclusion of Indian debt in the JPMorgan Emerging Market index last month, which has led many traders to anticipate higher returns as interest rates are poised to decrease.
Long-Term Indian Bonds Gaining Popularity
The addition of India to JPMorgan’s emerging markets bond index is injecting even more enthusiasm into the market. ICICI Prudential Life Insurance Co. believes this is a significant development, particularly for long-term bonds. Vidya Iyer, a senior fund manager at the company, notes that a substantial 40% of the selected bonds have maturities of 15 years or more, indicating a strong preference for these instruments.
Government Considering Budget Adjustments
The Indian government is actively considering how to best utilize its surplus cash. One option under consideration is to buy back bonds. However, if the response to this initiative remains subdued, the government may opt to reduce its borrowing activities. A final decision will be announced in the full budget after the national elections conclude next month.
Fintechs Spot Opportunity in Bond Market
The surge in retail investor participation in equity markets during the Covid lockdown has sparked an interest in the bond market. Fintech companies are eager to capitalize on this trend and foresee a similar increase in retail participation in the bond market. The Securities and Exchange Board of India (SEBI) recently allowed companies to issue bonds with a face value of Rs 10,000, making them more accessible to individual investors. This development positions bonds as a potential competitor to fixed deposits (FDs).
Foreign Investors Favoring Long-Term Indian Bonds
Foreign investors are increasingly allocating funds to Indian bonds with maturities of 10 years or more. The proportion of foreign money allocated to these long-term bonds climbed to 17% last week, up from 11% in September. Conversely, the allocation to bonds maturing within five years declined by 10 percentage points to 44% during the same period.
Indian Bonds Show Resilience to US Treasury Swings
Indian bonds are demonstrating remarkable resilience in the face of fluctuations in US Treasury yields. A Bloomberg analysis reveals that for every one basis-point gain in the 10-year US Treasury yield, benchmark Indian bond yields have risen by an average of only 0.23 basis points. Similarly, for a one basis-point decline in the US Treasury yield, Indian bond yields have fallen by an average of 0.32 basis points. This suggests that Indian bonds are relatively less susceptible to volatility emanating from the US bond market.
Understanding Bond Pricing
Bond prices are determined by various factors. Episode 5 of Bonds Simplified explores the intricacies of bond pricing, highlighting the differences between theoretical value and listed value, and the distinct pricing mechanisms in primary and secondary markets. This video provides valuable insights into the complexities of bond pricing, a crucial aspect of investing in these instruments.