Indian govt bonds surge as SVB collapse casts doubt on Fed rate hike

Rupee gains and Indian yield curve steepens as short-term bonds benefit from Fed view

Indian government bonds strengthened sharply, particularly those of shorter maturity, as the collapse of the California-based Silicon Valley Bank (SVB) prompted investors to rush to the safety of American debt, leading to a plunge in US bond yields.

A decline in US bond yields increases the appeal of higher-yielding fixed-income assets in emerging markets such as India. The rupee also strengthened, gaining 14 paise versus the US dollar to 81.91, as the decline in returns from US bonds led to a weaker dollar index, traders said.

The most liquid Indian 10-year bond was last trading at 7.38 per cent yield as against 7.43 per cent at close on Friday. Bond prices and yields move inversely. Mirroring the sharper fall in short-term US bond yields, the domestic five-year bond yield declined by a greater extent than the 10-year bond yield.

The most traded five-year government bond in the secondary market was last at 7.30 per cent, 10 basis points lower than previous close. The sharper fall in short-term bond yields has caused the Indian sovereign yield curve to steepen, after having flattened significantly and even witnessed inversions of late.

US bond yields plummeted as the seizure of SVB’s assets and the resultant ripples in the American banking sector led to anticipation of the Federal Reserve opting to either hold off on a fresh rate hike or to raise rates by a small quantum.

According to reports, analysts from Goldman Sachs said on Sunday that they no longer expect the US Federal Reserve to raise rates at its March 22 meeting, given the latest bout of volatility in the banking sector.

Yield on the 10-year US bond slumped 23 basis points on Friday, while that on the two-year bond, which is extremely sensitive to interest rate expectations, nosedived 31 bps.

“The most important takeaway that has emerged from the SVB episode is the possibility of the Federal Reserve going slow or pausing rate hikes. That is driving the bond rallies in the US and here,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership.

“In India, the space for a bond rally is most at the one-year to three-year point of the curve, given the fact that the curve had become completely flat. Depending on what the Fed says later this month, we could test the 7.35 per cent level for the 10-year bond,” he said.

At present, Fed fund futures, which reflect expectations on the trajectory of US policy rates, predict an 85 per cent chance of a 25-bps rate hike by the Fed this month and a 15 per cent chance of a pause in hikes. Earlier this month, the futures were forecasting an almost 70 per cent chance of a 50-bps hike by the Fed in March.

Certain aspects of a US official jobs report released Friday also strengthened the view of the Fed going easier on rate hikes. While job additions in February remained strong, the average hourly earnings rose by a lower-than expected quantum.

“The Indian rupee opened 29 paise stronger at 81.76; the slower (US) wage growth was sufficient for the markets to change their hawkish views of the Fed. The expectations of the Fed are now more unknown as a result of the bankruptcy of the SVB Bank,” said Ritesh Bhansali, vice president, Mecklai Financial Services.

“The Indian rupee is expected to trade between 81.60 to 82.00 levels during the day. Exporters are advised to hold. While importers can increase their hedges near 81.65 levels,” he said.