India’s forgotten 8% yielding bonds seen luring foreigners

Mumbai: Foreign investor holdings of Indian corporate bonds have slumped to a 19-month low, despite world-beating economic growth and yields close to 8 per cent. That’s a situation that may not last in a planet being taken over by negative interest rates.

Overseas funds had used about 65 per cent of their overall $51 billion cap for corporate debt holdings as of August 25, down from 73 per cent at the start of the year and the lowest since January 2015, according to data from National Securities Depository Ltd. Top-rated 10-year company notes in India pay 7.81 per cent, compared with 3.46 per cent in China. Those rated AA have an yield of 8.38 per cent.

“India is an irresistible destination for foreign investors given the negative yields elsewhere in the world,” said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds Funds Management Co., who sees holdings climbing back to 75 per cent of the limit by next March. “Relatively higher yields on corporate bonds and the uptick in the Indian economy will result in foreigners returning.”

The outlook for India’s $2 trillion economy has improved after Prime Minister Narendra Modi took steps to lure foreign investment, cut red tape and build infrastructure. Aberdeen Asset Management Plc says a new goods-and-services tax and the appointment of Deputy Governor Urijit Patel as central bank chief highlights the reform drive.

“India is on the path of positive structural reform that will lower both credit and inflation risk premiums and increase productivity that allows for rupee appreciation,” said Leong Lin-Jing, Singapore-based investment manager at Aberdeen, which holds about $11 billion of emerging-market assets. “Indian bonds are a good asset class.”

The rupee climbed 2.4 per cent in the last six months against the dollar and its three-month implied volatility plunged to 6.19 per cent from last year’s high of 10 per cent about 12 months ago. Gross domestic product expanded 7.6 per cent in the year to March 2016.

Money managers are regaining their appetite for riskier markets. Pacific Investment Management Co. said in a report this month that as commodities stabilise and investors hunt returns, it is favouring emerging-market currencies that offer high yields. With 30 per cent of global government yields in negative territory due to monetary easing, BlackRock Inc. said it sees a “new investment paradigm.”

“I would expect the high yield offered by rupee-denominated bonds to attract incremental flows in views of the increasingly negative global yield environment,” said Pierre Faddoul, head of credit research at Tokio Marine Asset Management International in Singapore. “The passing of the GST bill could be viewed by international investors as a sign of commitment to reform and fiscal consolidation, both of which are bond-positive.”

The average cost of credit-default swaps protecting the debt of eight local issuers has dropped to 303 basis points, down 119 basis points from this year’s high in February.

Indian companies raised 926.93 billion rupees selling rupee bonds in the three months ended June 30, the highest second-quarter sales since at least 2005, according to data compiled by Bloomberg. Power Grid Corp. of India plans to sell up to 40 billion rupees of notes next month, while ICICI Lombard General Insurance Co. last month became the first insurance firm to sell rupee bonds.

Credit Risk

Demand for local-currency bonds declined because of high yields offered by other emerging markets, according to PineBridge Investments Europe Ltd.

“India is now considered a safe haven and the demand for local bonds may not return until yields have come down further in Brazil or Indonesia,” said Anders Faergemann, a London-based senior sovereign portfolio manager at PineBridge.

India is still viewed positively among foreign investors and company debt is an attractive alternative to sovereign bonds, he added.

“The rupee’s resilience amid global uncertainty will also play positively for bonds,” said Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management Co. in Mumbai. “The hunt for higher yields will likely result in foreign institutional investor debt limits in corporate bonds being utilised, albeit gradually.”