India’s holdings of US Treasury Securities increased 4.3% on-month and 1.9% on a year-on-year basis in August to $221.2 billion, according to the Securities and Exchange Board of India’s (SEBI) November Bulletin.
Dealers said that the rise took place because most central banks, including the Reserve Bank of India (RBI), looked at US papers as a safe haven as they are considered to be most liquid and safe.
"When inflation went above the comfort zone in US, most of the bigger economies including India have reduced their holding as it is a double edged sword when FED started increasing the rates at a rapid pace besides currency risk with the fear of MTM losses," said said Venkatakrishnan Srinivasan, Founder and Managing Partner at debt advisory firm Rockfort Fincap.
He further added that however, for the past few months few economies including India have started investing back in US treasury with the expectation of US rates peaking out, moderatation in inflationary figures.
According to SEBI’s Bulletin, the highest on-month rise in holdings was witnessed by the UAE and Bahamas at 15.7% and 12%, respectively. In August, Japan held the most US Treasuries at $1,199.8 billion, followed by China, with $971.8 billion.
“At the end of August 2022, Japan was the biggest foreign holder of US Treasury Securities, holding 16.0 per cent of the total US Treasury Securities, followed by China (12.9 percent). The total foreign holding of US Treasury Securities at the end of August 2022 was USD 7509.0 billion,” the SEBI bulletin said.
US treasury yields
Money market dealers said that the yield on 10-year US Treasury notes has increased by more than 50 basis points due to the consistent rate hikes by the US Federal Reserve.
The Federal Reserve had on November 2 raised its benchmark interest rate by 75 basis points. The US central bank’s move raised its key short-term rate to a range of 3.75-4 percent, its highest level in 15 years.
It was the Fed’s sixth rate hike this year — a streak that has made mortgages and other consumer and business loans increasingly expensive and heightened the risk of a recession.
The rate hikes were instituted to tame high inflation in the US. Following this, the Reserve Bank of India (RBI) started increasing the repo rate and has so far raised it by 190 basis points since May.
Even though yields on the US Treasury notes have increased, India’s benchmark bond yield remained almost range-bound and has not moved substantially.
The yield on the 10-year benchmark 7.26% 2032 bond was trading at 7.3041% during afternoon trade on November 22.
The way ahead
Dealers expect that India will try to increase its US Treasury holdings as these notes will be attractive even after their yields ease.
“Even though the Fed increased rates by 75 bps in its last policy, it has indicated moderation in future rate hikes. The US treasury, too, has reacted positively, with the 10-year US treasury trading well below 4%,” said Srinivasan.
He added that as the fear of MTM losses is reducing along with the expectations of some easing in currency risks, India will try to increase its investments in US treasuries now as the rates seem to have peaked there and still offer very attractive yields.
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