Key Takeaways
- SBI Mutual Fund expects 10-year bond yield to rise above 7%.
- Central bank's hawkish stance on inflation is driving the market.
- Fund will avoid adding longer-term bonds to its portfolio.
India’s largest asset manager, SBI Mutual Fund, has predicted that the 10-year bond yield will rise and stay above 7% in the near term. This forecast is based on the central bank's hawkish stance on rising inflation, which is fuelled by the prolonged Middle East war, according to Mansi Sajeja, a fund manager at SBI Mutual Fund.
Sajeja stated that budget and currency vulnerabilities, along with a potential 'inflection point' in the interest-rate cycle, will keep long-term bonds under pressure. As a result, the fund, which manages debt worth around $29 billion, will refrain from adding longer-term bonds to its portfolio.
Global bond markets have experienced significant repricing in sovereign yields across most key jurisdictions, influenced by above-target outcomes on headline inflation and weak fiscal metrics, as noted by the fund manager.
India's 10-year benchmark bond yield is currently trading around 6.96%, having risen over 20 basis points in the last four weeks. This increase is driven by hawkish commentary from both the Indian and U.S. central bank heads. The Federal Reserve is expected to raise rates next Wednesday, while the Reserve Bank of India will announce its decision on October 7.
A mismatch between demand and the large supply of government securities is also deterring investors from adding long-duration debt to their portfolios, according to Sajeja. India is due to borrow a gross amount of around 7.90 trillion rupees ($82.83 billion) through the sale of bonds in the October-March period, while states could raise as much as 9 trillion rupees in the latter half of the year.
Shorter-tenor bonds, however, have been supported by a large liquidity surplus generated by strong inflows into the central bank foreign currency deposit scheme. This liquidity, when swapped into rupees, has flooded the banking system with record-high liquidity. Given the size of liquidity available and in the absence of any permanent withdrawal in sight, deployment in the ultra-short-term papers is expected to be steady, Sajeja said.
There could be a gradual upward repricing of the government bond yield curve as liquidity normalises, according to the fund manager. This prediction is based on the current market conditions and the expected actions of the central banks.
Bond markets globally have witnessed material repricing in sovereign yields across most key jurisdictions.
Mansi Sajeja, Fund Manager at SBI Mutual Fund
The evolving global context continues to be shaped by above-target outcomes on headline inflation and weak fiscal metrics.
Mansi Sajeja, Fund Manager at SBI Mutual Fund
