India-US bond yield gap at 20-year low, Jefferies sees sustainability

The India-US 10-year bond yield gap has narrowed to a 20-year low. A Jefferies report notes this is sustainable, citing a significant compression in the inflation differential between the two economies over the past decade.

The gap between Indian and US 10-year government bond yields has narrowed to around two percentage points, near its lowest level in about two decades. However, a sharp reduction in the inflation differential between the two economies suggests India may be able to sustain a lower yield premium over US Treasuries, according to a Jefferies India Equity Strategy report.

“India’s rate premium compressed vs. US,” Jefferies said, noting that India’s 10-year government security yield has risen by around 50 basis points over the past two months alongside the rise in global bond yields. The India-US bond yield gap is closely watched by global investors as it influences the relative returns and risks of investing in the two markets.

Inflation Differential: The Key Factor

However, Jefferies said the narrowing yield gap should be viewed along with the significant reduction in the inflation difference between India and the US over the past decade.

“While the India-US 10Y yield differential is now near 20-yr lows, the inflation differential has also compressed materially over last 10yrs,” the report said.

According to Jefferies, India’s consumer price inflation was, on average, about 6.1 percentage points higher than US inflation during FY07-FY16. The gap narrowed sharply to around 1.5 percentage points during FY17-FY26.

The brokerage said the structural decline in the inflation differential could allow Indian government bonds to offer a lower yield premium over US Treasuries than in the past.

Global Bond Yields on the Rise

The assessment comes at a time when government bond yields have risen across major global markets. Jefferies said the US 10-year Treasury yield has moved above 5 per cent, while Japan’s 10-year government bond yield has crossed 3 per cent. Bond yields in the UK and Germany have also moved higher.

Indian bond yields have also increased. According to Jefferies, the 10-year government bond yield has risen by about 50 basis points over the past two months, partly due to expectations of tighter monetary policy.

Jefferies said the structurally narrower inflation gap between India and the US indicates that the current lower bond yield differential may be more sustainable than in earlier periods. This suggests that even with Indian bond yields rising recently, the premium over US Treasuries may not need to return to the levels seen in the past, the brokerage said. (ANI)

(Except for the headline, this story has not been edited by Asianetnews Editorial staff and is published from a syndicated feed.)