Stockgram

The sell-off in the world’s largest bond market, coupled with easing yields in India, has compressed the spread between US Treasuries and Indian benchmark bonds to a more than two-decade low. On Thursday (May 22), India’s 10-year benchmark bond yield closed at 6.3%, while the US Treasury yield stood at 4.6%, narrowing the spread to just 167 basis points (bps)—the lowest since July 2004.





Foreign participation in US Treasuries has declined amid rising concerns over economic uncertainty. Investor sentiment took a further hit after Moody’s Ratings stripped the US of its top credit grade last week. The pressure intensified following fears that the US President’s latest tax bill could add trillions of dollars to the country’s already bloated fiscal deficit.





In contrast, Indian bond yields have softened, buoyed by expectations of a higher-than-usual dividend transfer from the Reserve Bank of India (RBI) and easing inflation. A rally in Indian government bonds has contributed to the sharp contraction in the yield differential, making Indian debt more attractive to foreign investors despite global risk-off sentiment.





Interestingly, the rare yield movement has caught the attention of Uday Kotak, Founder and Director of Kotak Mahindra Bank, who believes the development could have far-reaching implications for global capital flows and investor sentiment.





“Will we one day see Indian yields lower than the US? Depends mainly on relative inflation, risk premium, trust, and liquidity, for global and domestic investors in these two countries,” Kotak wrote on the social media platform X.





Typically, when the yield gap narrows, foreign portfolio investors (FPIs) tend to exit Indian bonds in favour of safer returns in their home markets. However, in recent years, India’s improving fiscal position and moderating inflation have helped anchor benchmark bond yields, even as US Treasury yields climbed, reducing the incentive for capital outflows.





As a result, FPIs have remained net buyers of Indian bonds, even while pulling back from equities. Since the beginning of the year, overseas investors have infused $2.5 billion into Indian bonds, while offloading $10.3 billion worth of equities.





While the yield on India’s 10-year benchmark bond has declined from 7.62% in June 2022 to around 6.25%, US Treasury yields have moved in the opposite direction. After briefly breaching the 5% mark in October 2023, the yield on the US 10-year bond eased to 3.60% by September 2024 but has since climbed back and is currently hovering around 4.58%.