SBI Mutual Fund says 10-year yield will soar beyond 7%
MUMBAI: India’s largest asset manager expects the 10-year bond yield to rise and stay above 7% in the near term, as the central bank turns hawkish on rising inflation fuelled by the prolonged Middle East war. Budget and currency vulnerabilities as well as a likely “inflection point” in the interest-rate cycle would keep long-term bonds under pressure, Mansi Sajeja, a fund manager at SBI Mutual…
India’s largest asset manager, SBI Mutual Fund, believes the 10-year bond yield will rise and remain above 7% in the near term. This prediction is due to the Indian central bank becoming more hawkish in its approach to rising inflation, which is being fueled by the ongoing Middle East conflict. Senior fund manager Mansi Sajeja stated this during a recent briefing.
Sajeja added that the fund's $29 billion portfolio of debt will not include longer-term bonds due to the expected yield surge. The global bond market has been experiencing significant sell-off in recent weeks, causing developed debt markets to feel the pressure. This is largely due to fears that persistent inflation, increased government borrowing, and higher oil prices could keep interest rates elevated for an extended period.
The global fund manager commented, "Bond markets globally have witnessed material repricing in sovereign yields across most key jurisdictions. The evolving global context continues to be shaped by above-target outcomes on headline inflation and weak fiscal metrics." India's benchmark 10-year bond yield is currently at 6.96%, a 20-basis-point increase over the last four weeks.
This rise in yields comes amidst hawkish statements from both the Indian and US central bank leaders. The Federal Reserve is set to raise rates on Wednesday, while the Reserve Bank of India will announce its decision on October 7. Sajeja explained that the mismatch between demand and the substantial supply of government securities is discouraging investors from adding long-duration debt to their portfolios.
India is projected to borrow around 7.90 trillion rupees ($82.83 billion) through October-March, while state governments may raise up to 9 trillion rupees in the latter half of the year. Meanwhile, shorter-term bonds have been buoyed by a substantial liquidity surplus generated by strong inflows into the central bank's foreign currency deposit scheme.
This surge in liquidity, when converted back into rupees, has flooded the banking system with record-high liquidity. Sajeja mentioned that due to the ample liquidity and the lack of any permanent withdrawal, deployment in ultra-short-term papers is anticipated to be steady. As liquidity normalizes, a gradual upward shift in the government bond yield curve is expected.
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