The movement so far is perfect to the script with India 10Y bond losing steam at 8.15-8.20% while US 10Y supported at 2.35-2.40%. It was also seen that India-US 10Y bond spread into 5.70-5.85% is tough to hold with ideal range seen at 5.85-6.35%. Suggestion was made to FIIs to shift appetite from India to US through exit of India 10Y at 8.15-8.20% and buy US 10Y at 2.35-2.40% (for unwind of 6.35% entry through chase of India 10Y from 8.35-8.40% to 8.20% and US 10Y from 1.90-2.0% to 2.35%).
What next? There is now clarity on RBI monetary stance on 2nd December, retaining pause on policy rates (and CRR/SLR) with cautious tone on inflation and attention on external factors from FED monetary stance and price stability on imported commodity assets. There is no issue whatsoever on domestic liquidity (and interest rates) when Banks divert depositor monies into Repo counter and hold huge quantum in unproductive excess SLR, while investors seen content with low Gilt/AAA bond yields. What is missing is the opportunity to invest; solution to credit risk appetite (at reasonable return on investment) can't be achieved through cut in policy rates! It is possible that RBI does not intend to do repeat of 2013, when policy rates were cut in the 1st half only to be reversed (and more) in the 2nd half. RBI stance is seen to be in wait-and-watch till clarity on FED timing of shift into rate-hike mode and resultant price impact on commodity assets and Rupee exchange rate. It is also seen prudent for RBI to wait till March 2015 economic data print to get confirmation of favourable trending in inflation, growth and twin-deficits. On the other hand, signs of growth pick-up in the US economy and downward trend in unemployment number would retain pressure on US 10Y bond yield, going forward.
All taken, broad trading range for rest of 2014 for India 10Y bond is set at 8.20-8.45% and US 10Y at 2.20-2.45% with India-US 10Y bond spread stability at 5.85-6.10% (seen supportive to FII India appetite and to extend stability in USD/INR exchange rate at 60.95/61.20-61.70/61.95). The strategy is to play end-to-end of set ranges as break-out either-way is tough to sustain!
Moses Harding
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