Spread between India’s 10-year bond yield and US treasury yield narrows to 20-year low

The outperformance of India’s benchmark bond over its US counterpart resulted in the gap between the two bond yields narrowing to the lowest level in 20 years. On Friday, the yield on the country’s benchmark bond closed at 6.8%, against the US Treasury yield of 4.7%, taking the spread between the two to about 200 basis points. That is the lowest gap since March 2005.

In comparison, the gap between the bond yields was as high as 320 bps at the beginning of 2024, according to Bloomberg data. The spread has averaged 350-400 bps over the past two decades.

Interestingly, the US bond market showed no respite even after the Federal Reserve cut benchmark interest rates by 100 basis points since mid-September. With the investors continuing to weigh on the inflationary pressures, the yield even marched towards close to the 5% mark.

On the other hand, bond yields softened back in India on the back of lower-than-expected government borrowings for FY25. Further, the inclusion of Indian bonds in the JPMorgan index starting in June 2024 also attracted foreign flows to the bond market. Over the last one year, foreign portfolio investors (FPIs) have pumped $15.4 billion into the debt market, according to Bloomberg data.

However, the narrowing gap between the yields has raised concerns in some sections of the investor community. India’s bond yield fell by 50 bps in 2024, even though there was no cut in interest rates during the year. On the flip side, the US bond yield scaled up by 80 bps, resulting in the domestic bond outperforming the US by 130 bps during the year.

“I am quite worried about the fact that Indian bonds, as compared to where the parity should be, versus, US bonds, are looking more expensive, and Indian currency too looks more expensive,” said Vikash Kumar Jain, investment analyst at CLSA India, during an interaction with CNBC-TV18. Jain further added that in the next four to five weeks, when the macro is going to be very important and big, there could be some pressure.

Not to mention, a rally in domestic bonds bolstered the Treasury gains of commercial banks in India. During the first half of FY25, the scheduled commercial banks (SCBs) in the country together have reported a notional gain of ₹40,187 crore as of September 2024. That compares with a mark-to-market (MTM) loss of ₹34,024 crore reported by them in March 2024.