Indian bonds see biggest outflows since index addition

The extra yield on India’s 10-year bonds over similar maturity Treasuries narrowed to about 243 basis points Monday

Overseas investors are cutting their holdings of Indian bonds at the fastest pace since at least June, as rising US yields damp the appeal of the Asian nation’s fixed-income securities.

Global funds sold a net 49.6 billion rupees ($588 million) of the so-called Fully Accessible Route bonds last week, according to Clearing Corporation of India Ltd. data. That’s the biggest weekly outflow from the securities since they were included in JPMorgan Chase & Co.’s largest emerging-market bond index in June, according to Bloomberg calculations.

Foreign investors have offloaded a net 87.5 billion rupees of Indian debt this month amid the prospect of narrowing interest-rate differential between the US and India. US Treasury yields have jumped since Donald Trump’s election victory, with traders betting the Federal Reserve will have to slow down its easing cycle as the President-elect’s economic plans add to inflationary pressures.

“The Indian bond market has substantially outperformed the US and European government bond markets over the past year, but the spread between India and both global markets has reached historically tight levels,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA.

The extra yield on India’s 10-year bonds over similar maturity Treasuries narrowed to about 243 basis points Monday, close to the lowest in more than a year.

A more hawkish Indian central bank is also expected to cap the returns from local bonds. Reserve Bank of India chief Shaktikanta Das has pushed back against rate cuts after inflation accelerated to a 14-month high in October.

Still, further selling may be tempered as JPMorgan is looking to boost India’s weighting in its key bond index to 6% at the end of November. Both Bloomberg and FTSE Russell are planning to add the country’s bonds to their respective emerging-market gauges next year.