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 Fund, said on Thursday.

This means the fund, which manages debt worth around $29 billion, will refrain from adding longer-term bonds to its portfolio, said Sajeja.

Global bonds have sold off in recent weeks, pressuring developed debt markets amid concerns that sticky inflation, elevated government borrowing and higher oil prices could keep interest rates higher for longer.

“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,” the fund manager said.

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India’s 10-year benchmark bond yield is trading around 6.96%, up over 20 basis points in the last four weeks, amid hawkish commentary from 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 verdict 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, Sajeja said.

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 meanwhile have been supported by a large liquidity surplus generated by strong inflows into the central bank foreign currency deposit scheme. This, 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, adding that there could be a gradual upward repricing of the government bond yield curve as liquidity normalises.