Indian bonds outperforming most Asian peers despite swings in treasuries

By Marcus Wong

Indian bonds are holding up better than most Asian peers despite the swings in Treasuries, boosting the appeal of the nation’s debt before its inclusion into major global indexes.
 

For every one basis-point gain in the 10-year US paper, yields on benchmark Indian notes rose by an average 0.23 basis points, according to a Bloomberg analysis of the moves since 2022. For a similar drop in the US debt, Indian bond yields fell by 0.32 basis points.

“India is benefiting from a very positive domestic story,” said Mitul Kotecha, head of FX and EM macro strategy for Asia at Barclays Plc, citing the upcoming index inclusion, fiscal prudence and rupee stability. “These factors will attract growing portfolio inflows to India.”

 

The relative stability of Indian bonds is adding to the optimism toward local assets. India’s foreign-exchange reserves hit a record high in April, and the rupee has remained emerging Asia’s best performing currency even against a strong dollar, reflecting increased investor interest.

Since JPMorgan Chase & Co.’s announcement in September, global funds have poured $8 billion into so-called Fully Accessible Route securities, with Standard Chartered Plc. forecasting an additional inflow of up to $30 billion upon the start of India’s inclusion in June. 

China’s bonds show the least reaction to US notes among emerging Asia due to tighter control. However, investors may still prefer India’s debt thanks to the rupee’s low volatility.

 

Other Asian currencies and bonds are more vulnerable to the swings in the yen and yuan due to stronger trade linkages and thinner spread over Treasuries. South Korean bonds are the most sensitive to Treasury moves, according to the Bloomberg analysis of scenarios where the US yield climbed or fell by more than 30 basis points over a 10-day period.

The rupee and peso are the least sensitive Asian currencies to both the dollar-yuan and the dollar-yen, while won and the ringgit are the most vulnerable, Goldman Sachs strategists including Danny Suwanapruti wrote in a note.

India’s bonds have also been helped by the government’s programs of reforms and fiscal restraint. Investors are now focused on the ongoing national polls, where a third term for Prime Minister Narendra Modi may further bolster the appeal of local assets. 

“The Indian election feels like it should be one of the lower volatility political events this year,” said Paul Greer, a money manager at Fidelity International in London. Though there might be some risks for investors, India is “a good story. I am quite upbeat about it,” he said.