Indian bonds make Asia's best investment-grade gains
Sunday, 6 January 2008
Anil Varma
BOND funds doubled their holdings of Indian debt, Asia's best-performing investment-grade market in 2007, predicting currency gains will stop commodity prices from fueling inflation.
Reserve Bank of India Governor Yaga Venugopal Reddy allowed the rupee to appreciate 12.3 percent this year, reducing costs of imported oil, gold and copper. Inflation slowed to a 3.1 percent annual pace in November, compared with 4.3 percent in the U.S. and 6.9 percent in China.
Aberdeen Asset Management Plc, Scotland's largest independent money manager, and DBS Asset Management Ltd., part of Southeast Asia's biggest lender, are buying Indian bonds to profit from higher prices and the stronger rupee. Debt funds in India, including local units of Deutsche Asset Management and ING Investment Management, more than doubled this year to 2.1 trillion rupees ($54 billion), according to data compiled by the Association of Mutual Funds in India.
``India is bucking a regional trend of higher inflation,'' said Edwin Gutierrez, who helps oversee $5.5 billion of emerging-market debt in London at Aberdeen-based Aberdeen Asset, which increased its India debt holdings 50 percent since June. ``Currency strength has helped and I see that continuing.''
Investors measuring performance in dollars earned 19.4 percent in Indian debt this year, compared with 8.9 percent for Treasuries, according to data compiled by HSBC Holdings Plc. International investors bought $2.2 billion, twice as much as last year, Securities & Exchange Board of India data show. Local banks hold 70 percent of the debt and broader ownership may help fund $500 billion for roads and ports over five years.
India, Indonesia
The yield on the 5.48 percent bond due in June 2009 fell to 7.7 percent today from a six-year high of 8.19 percent in April. The price rose to 97 from 95.95. The 10-year yield declined to 7.82 percent from a 4 1/2-year high of 8.4 percent in July 2006.
India's local currency bonds are rated BBB- by Standard & Poor's, the lowest investment grade. They returned 6.3 percent in 2007, second only to Indonesia among 10 Asian debt markets outside of Japan, according to London-based HSBC. Indonesia's bonds, rated BB+, returned 9.8 percent.
`Getting Expensive'
Rising global money-market borrowing costs prompted some investors to shun Indian debt, according to Geneva-based Pictet & Cie., Switzerland's largest closely held private bank. The three-month dollar London interbank offered rate rose 0.86 percentage point above the Fed's 4.25 percent benchmark overnight rate on Dec. 11, the biggest gap since November 1999.
``Funding is getting expensive'' for investors borrowing dollars to buy rupee debt, said Ting Wee-Ming, who helps manage $2 billion of emerging market debt at Pictet in Singapore. ``Indian bonds might not be attractive now.''
Inflation may accelerate as stagnant harvests force the South Asian nation to import wheat for the third year in 2008. The government will have to increase retail fuel costs should crude oil rise, according to the central bank.
India's finance ministry this month credited a stronger rupee and improved supply management for curbing commodity price increases. Palm oil prices in India, the second-biggest buyer of vegetable oils, rose 10 percent this year, even as the benchmark Malaysian futures contract jumped 57 percent.
Rates on Hold
Goldman Sachs Group Inc. forecasted rupee gains will cut as much as 0.6 percentage point off price increases in 2008. Inflation will slow to 4.4 percent in the year starting April 2008, from 4.5 percent in the current fiscal year, the world's biggest securities firm predicted in a Dec. 17 report.
Reddy said on Dec. 3 his medium-term goal is to keep inflation at about 3 percent, after reducing it from a two-year high of 6.69 percent in January.
``The moderation in inflation will allow the central bank to stay neutral on interest rates,'' said Suresh Soni, head of trading at Deutsche Asset Management Pvt. in Mumbai, which manages $3.2 billion. The 10-year yield will fall to 7.5 percent by the end of March, he said. That would give investors a 4.1 percent return.
The Federal Reserve cut rates three times this year to prevent a U.S. recession, while the Reserve Bank held its target rate at a five-year high since March. India's economy expanded 9.4 percent in the year through March 2007, second only to China among the world's 20 biggest economies.
Yield Premium
India's two-year debt yielded 4.96 percentage points more than Treasuries of similar maturity this month, the most in six years. The spread more than doubled from 2.15 points since July.
India caps foreign holdings at $2.6 billion of the $330- billion government securities market and corporate debt at $1.5 billion because regulators are concerned a sudden outflow of funds would trigger a collapse in the rupee. Global investors currently own $3.5 billion of India debt, government data show.
U.S. debt prices are more volatile, so the potential for losses is greater. A measure of the Indian 10-year yield's volatility fell as low as 1.4 percent on Dec. 19, the least among 10 Asian bond markets outside of Japan. The similar measure for Treasuries was 43 percent on Dec. 21.
``We expect bonds to rally,'' said Rachana Mehta, head of emerging markets debt at Singapore-based DBS Asset, which has $16 billion under management. The company plans to boost Indian holdings to 15 percent of its Asia Bond Fund from 11 percent.
Bloomberg
BOND funds doubled their holdings of Indian debt, Asia's best-performing investment-grade market in 2007, predicting currency gains will stop commodity prices from fueling inflation.
Reserve Bank of India Governor Yaga Venugopal Reddy allowed the rupee to appreciate 12.3 percent this year, reducing costs of imported oil, gold and copper. Inflation slowed to a 3.1 percent annual pace in November, compared with 4.3 percent in the U.S. and 6.9 percent in China.
Aberdeen Asset Management Plc, Scotland's largest independent money manager, and DBS Asset Management Ltd., part of Southeast Asia's biggest lender, are buying Indian bonds to profit from higher prices and the stronger rupee. Debt funds in India, including local units of Deutsche Asset Management and ING Investment Management, more than doubled this year to 2.1 trillion rupees ($54 billion), according to data compiled by the Association of Mutual Funds in India.
``India is bucking a regional trend of higher inflation,'' said Edwin Gutierrez, who helps oversee $5.5 billion of emerging-market debt in London at Aberdeen-based Aberdeen Asset, which increased its India debt holdings 50 percent since June. ``Currency strength has helped and I see that continuing.''
Investors measuring performance in dollars earned 19.4 percent in Indian debt this year, compared with 8.9 percent for Treasuries, according to data compiled by HSBC Holdings Plc. International investors bought $2.2 billion, twice as much as last year, Securities & Exchange Board of India data show. Local banks hold 70 percent of the debt and broader ownership may help fund $500 billion for roads and ports over five years.
India, Indonesia
The yield on the 5.48 percent bond due in June 2009 fell to 7.7 percent today from a six-year high of 8.19 percent in April. The price rose to 97 from 95.95. The 10-year yield declined to 7.82 percent from a 4 1/2-year high of 8.4 percent in July 2006.
India's local currency bonds are rated BBB- by Standard & Poor's, the lowest investment grade. They returned 6.3 percent in 2007, second only to Indonesia among 10 Asian debt markets outside of Japan, according to London-based HSBC. Indonesia's bonds, rated BB+, returned 9.8 percent.
`Getting Expensive'
Rising global money-market borrowing costs prompted some investors to shun Indian debt, according to Geneva-based Pictet & Cie., Switzerland's largest closely held private bank. The three-month dollar London interbank offered rate rose 0.86 percentage point above the Fed's 4.25 percent benchmark overnight rate on Dec. 11, the biggest gap since November 1999.
``Funding is getting expensive'' for investors borrowing dollars to buy rupee debt, said Ting Wee-Ming, who helps manage $2 billion of emerging market debt at Pictet in Singapore. ``Indian bonds might not be attractive now.''
Inflation may accelerate as stagnant harvests force the South Asian nation to import wheat for the third year in 2008. The government will have to increase retail fuel costs should crude oil rise, according to the central bank.
India's finance ministry this month credited a stronger rupee and improved supply management for curbing commodity price increases. Palm oil prices in India, the second-biggest buyer of vegetable oils, rose 10 percent this year, even as the benchmark Malaysian futures contract jumped 57 percent.
Rates on Hold
Goldman Sachs Group Inc. forecasted rupee gains will cut as much as 0.6 percentage point off price increases in 2008. Inflation will slow to 4.4 percent in the year starting April 2008, from 4.5 percent in the current fiscal year, the world's biggest securities firm predicted in a Dec. 17 report.
Reddy said on Dec. 3 his medium-term goal is to keep inflation at about 3 percent, after reducing it from a two-year high of 6.69 percent in January.
``The moderation in inflation will allow the central bank to stay neutral on interest rates,'' said Suresh Soni, head of trading at Deutsche Asset Management Pvt. in Mumbai, which manages $3.2 billion. The 10-year yield will fall to 7.5 percent by the end of March, he said. That would give investors a 4.1 percent return.
The Federal Reserve cut rates three times this year to prevent a U.S. recession, while the Reserve Bank held its target rate at a five-year high since March. India's economy expanded 9.4 percent in the year through March 2007, second only to China among the world's 20 biggest economies.
Yield Premium
India's two-year debt yielded 4.96 percentage points more than Treasuries of similar maturity this month, the most in six years. The spread more than doubled from 2.15 points since July.
India caps foreign holdings at $2.6 billion of the $330- billion government securities market and corporate debt at $1.5 billion because regulators are concerned a sudden outflow of funds would trigger a collapse in the rupee. Global investors currently own $3.5 billion of India debt, government data show.
U.S. debt prices are more volatile, so the potential for losses is greater. A measure of the Indian 10-year yield's volatility fell as low as 1.4 percent on Dec. 19, the least among 10 Asian bond markets outside of Japan. The similar measure for Treasuries was 43 percent on Dec. 21.
``We expect bonds to rally,'' said Rachana Mehta, head of emerging markets debt at Singapore-based DBS Asset, which has $16 billion under management. The company plans to boost Indian holdings to 15 percent of its Asia Bond Fund from 11 percent.
Bloomberg