Vigilant and the gambler enters the bond market. No, this is not the beginning of a new joke, it is a comic version of India’s fixed-income salon these days. There is no shortage of liquidity, but it is very difficult to get orders for good things even by bartender-country central bank-customers kazoling and threatening. At the same time, the powerful but dangerous Hooch is actively selling, although the lawyer-US Federal Reserve-is almost at the door.
Indian government bonds are ‘good goods’ and must be sold. This is the only way tax-deficient officials can spend to make money and move the economy out of its covid-inspired stupor. However, a mere 6% yield on a 10-year rupee paper from an investment grade sovereign alone would not have the 21% approximate return offered by a de-rated private borrower on a five-year note.
Kolkata-based cement maker Kesoram Industries Ltd., which defaulted last year, has recently given up on itself. ₹Of the 1,600 crore (1 221 million) junk bonds, it was sold to the likes of Goldman Sachs Group Inc. and Cerberus Capital Management.
But instead of gamblers, it seems that vigilant-troubled investors are never happy with the easing monetary and monetary policies — they seem to be bothering the Reserve Bank of India (RBI). The Central Bank, which is tasked with raising money for the Indian government, has invited fixed-income investors to join a tango and “prevent a bandh” from the so-called ‘dance of destruction’ by the Hindu goddess Shiva. See the RBI’s March 19 monthly bulletin for details of maneuvering moves around Bond vigilantes and the threat posed with colorful images, they are “markets, guns holster and saddle”.
However, right now the Fed is the only anger- and Gears-emerging markets are really apprehensive. The same story from Istanbul to Mumbai, with a significant difference: Turkish President Recep Tayyip Erdogan fired three central bank chiefs in two years .
That is not enough to impress bond buyers. Foreigners have withdrawn billions of dollars from Indian bond markets in the last 12 months. With a deficit of 9.5% for the year ending March 31, domestic banks are also withdrawing from the February 1 budget, which gave the government bad news about a planned 6.8% deficit for the coming fiscal year.
Despite concerns in the US market stemming from the prospects of normal-growth and inflation, the Indian economy is likely to lose 11% of its potential output permanently, according to Crisil, a local subsidiary of S&P Global Inc. Halved from 8.3% to 4%. Then came the virus, and drops to 8%.
Vaccines are accelerating, but occasional, localized lockdowns can slow recovery if ongoing secondary infections overwhelm the population. If the US Fed suddenly has to rethink how fast it can cope before the US economy recovers by raising interest rates, add a little provocative risk. It accelerates capital flights from emerging markets. Currencies will ignite like the Turkish lira this week.
Although the Indian rupee is the best emerging-market currency so far this year, 6% is not adequate compensation for 10-year notes. However, unlike in 2013, there is no fixed current account deficit to worry about. So the Fed’s fear is that it may not enter the Indian markets as it did then. In that case, it would be a good gamble on super-price Indian equities or affected bonds offering 21% higher rates.
Vanilla government bonds in Asia are paying very little, and insurers are being forced to take credit risk to pay off policyholders. “Take Vietnam, for example; Who would have ever thought that we would have a 2% interest rate for 10 year government bonds in a BB rated country? “Stephen von Willet, chief investment officer of Prudential Corporation Asia Limited, said at a recent Asian investors’ meeting.” But the only way to deal with it is to find attractive credit spreads. “
Therefore, it is not entirely irrational for vigilantes to dump bonds or gamble to raise their stakes, although one of them will continue to laugh at the bank next year and the other will become a butt of bar jokes.
Andy Mukherjee Bloomberg Opinion Columnist Covering Industrial Companies and Financial Services