US bond yields may stabilise at current levels: HSBC

US yields may stabilise at current levels, as it is unlikely that there will be any major reversals in terms of Fed tapering before Bernanke's testimony on July 17 and 18, or even prior to key data and US non-farm payrolls data, says Andre De Silva, MD & Head Of Asia-Pacific Rates & Global Research, HSBC.

There has been a swathe of outflows in global bond fund, particularly high yields and then closely followed by emerging markets hard currency debt, he says. But over recent weeks, there have been outflows in Asian local currency debt and India has seen USD 6 billion equivalent outflows over the past five weeks. De Silva feels, it is not just about bond flows, it is also about bond returns and probably that has been forex led. Also Read: EMs look attractive; weak currencies to help: Aberdeen AMC Below is the edited transcript of Andre De Silva's interview with CNBC-TV18. Q: We have seen a bit of stability in the US yields, there are some people like Marc Faber who have been saying that they can retreat all the way even to 2.2, do you expect stability and do you expect retreat of the yields before they start spiking again?
A: It is very difficult to say that there will be a rapid reversal in terms of Fed tapering. But at best, we can probably see some consolidation at current levels. However, I think there are a couple of time points to look towards. This week, once we do have key data, ultimately, we are waiting to next week's Friday non-farm payroll in the United States and then ultimately Ben Bernanke's semi-annual testimony on July 17 or July 18. It is unlikely we will see dramatic reversals anytime before those releases. Q: We have seen a significant amount of foreign institutional investors (FIIs) outflow from the Indian debt market, what is your sense, have you spoken to a few other investors, is it likely to continue, what is the outlook on the FII outflow into the Indian debt market?
A: First of all, one needs to put it in context of other markets. We have seen quite a swathe of outflows in global bond fund, particularly high yields and then closely followed by emerging market hard currency debt. Indeed, we have seen net outflows through the course of this year in emerging market hard currency debt compared to USD 22 billion worth last year.
But now we are beginning to see over recent weeks outflows in Asian local currency debt. In that, India has seen USD 6 billion equivalent outflows over the past five weeks. It is not just about bond flows, it is also about bond returns and probably that has been forex led. It is more about forex reaction rather than the underlying shrewd concern at this moment in time. Q: What is your sense regarding forex performance hereon? What kind of a fall are you expecting in the rupee and by when? Can the next round of selling start soon?
A: Whether you call it savage or shocking, there is a very similar headline influence in terms of those key currencies. If you look across all EM currencies, since early May, the two that have led the way in terms of currency weakness are the South African rand and then the Indian rupee.
This currency weakness in terms of record low levels that we have seen in India will have some beneficial impact in the medium-term, in particular something we have been touting collectively in terms of current account deficits (CAD) for quite a while. In my mind, it is very difficult to leverage off this and say there is going to be additional weakness of same degree. If anything, we could see a little bit of a pause, but it is very difficult to time these turning points at the moment in time. For now, I do not think it is as dramatic as we are seeing. Q: Can you think of some levels? Does the rupee get as bad as 63?
A: I am not saying it is going to go as far as that; 60 is a threshold that we have kept. It has been testing that and that is obviously a psychological level. To me, it is not a key currency call we have at the moment. There are others that have much more better risk-reward considerations.  (The rupee) probably may pause at current levels rather than 63.