sovereign bonds: In two weeks, debt turns from loser to favorite for funds

Just a month ago, global funds couldn’t wait to dump India’s sovereign bonds. Now, they’re rushing back at the fastest pace in more than two years.

Foreigners bought 136.7 billion rupees ($1.9 billion) of the debt in the first two weeks of February, set for the highest monthly inflow since June 2017, according to data compiled by Bloomberg. They sold 106.6 billion rupees last month.

The sudden switch is a testimony to the unprecedented changes introduced by policy makers. In an attempt to fund record borrowings, Prime Minister Narendra Modi is lifting foreign investment limits on some bonds, while the central bank has introduced long-term reverse repurchases to lower borrowing costs.

“The Reserve Bank of India’s policy bias has supported inflows and contributed to the strong rally in the shorter tenors,” said Stuart Ritson, a fund manager for emerging-market debt at Aviva Investors in Singapore. “The fiscal and inflation backdrop is challenging, but RBI policy should help support the market.”

After five interest-rate cuts in 2019 failed to jump-start a slowing economy, the RBI has taken to unconventional policies. It first used a Federal Reserve style-like Operation Twist, and then on Feb. 6 added a measure similar to the European Central Bank’s Long-Term Refinancing Operation as surging inflation restricts more rate cuts.

Shorter-tenor bonds have been the biggest beneficiaries of RBI’s plan to inject as much as $14 billion through one- and three-year funding operations

Foreign holdings of sovereign debt due in 2024, with a coupon of 7.32%, rose to about 11% on Feb. 14 from 7% on Feb. 5. The yields fell 31 basis points in that period, compared with an 11 basis points drop in the benchmark 10-year bond.

India is attracting inflows just as Indonesia, Asia’s other major high-yielding bond market, sees outflows. Foreign funds sold $835.3 million of Indonesian debt so far in February on concern the coronavirus outbreak may impact Chinese demand for the nation’s exports.

“Indian bonds are very attractive in the context of Asian bonds, given their high yields and lower volatility that increase risk-adjusted returns,” said Lin Jing Leong, a Singapore-based investment manager at Aberdeen Asset Management Asia Ltd. Bond markets “will certainly be supported” due to RBI’s long-term repo operations and more policy easing, he said.