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Understanding the Indian Fixed-Income Market

An Asset Class Too Large to Ignore


With a market value of approximately US$1.4 trillion, the Indian fixed-income market is one of the largest in Asia and not far off the Canadian bond market, which is estimated to be somewhere in the region of US$2 trillion in size.¹ What’s more is, the lion’s share of the Indian bond market is government issued or backed securities, which, on average, sport an investment-grade rating of BBB-, according to leading credit rating agency Standard & Poor’s.


The government of India’s credit strengths incorporate the country’s:

  • Robust growth outlook, which sees India’s economy expanding at a faster pace than its peers;
  • High foreign reserve levels that serve as a buffer against external shocks;
  • Diversified economic activity, centered around agriculture, consumption and infrastructure;
  • Implementation of pro-business and market-friendly reforms by policymakers; as well as
  • High domestic savings rate and increasing attention from large foreign investors.

 

At 3.46, the Indian credit market also has the second highest turnover ratio in Asia. Indian government bonds, as a segment of the overall market, cycle at a rate of 4.66.² To put that into a clearer context, Japan’s credit market has the highest turnover of the region, at 4.56.² This data indicates that activity in the secondary bond market, particularly for Indian sovereigns, is very buoyant.

 

7 Percent Yields versus Negative Yields… Take Your Pick

It is now a well-known fact, that over US$10 trillion in global sovereign bonds currently yield less than zero percent. Investors in Japanese and German government bonds are essentially paying these countries to hold their debt, as opposed to receiving interest payments on their investments, an unprecedented phenomenon in modern finance. And while interest rates in the U.S. and Canada have not fallen to these depths, their benchmark 10-year government securities yield a mere 1-2 percent. Enter, Indian bonds.


One of the primary differentiating factors for investors to consider Indian bonds as part of their overall portfolio, is generating greater yields. India’s benchmark 10-year government bond currently yields 7.10 percent, according to data compiled by Bloomberg.³ Furthermore, a 52-week trading range of 7.08 – 7.88 indicates that the yield on these bonds have been steadily coming down over the past year, as more investors pile into the asset class.³ Even so, Indian sovereigns offer a spread of around 600 basis points versus similar Canadian sovereign bonds, with a lot of fund managers considering India a relative “safe haven” within the emerging markets universe.⁴


On the corporate end of the spectrum, a 10-year, AAA Indian corporate bond yields 7.85 percent.³ By comparison, U.S. and Canadian BBB 10-year corporates yield 3.24 and 3.34 percent, respectively.³ So in this scenario, investors are getting an additional 460 basis points over North American corporates, with higher credit quality.

 

India Checks All the Right Boxes for Global Bond Investors

From a macro level, bond investors care the most about a country’s (or company’s) financial discipline and ability to repay its debt on time. With relatively low debt-to-GDP levels, expanding foreign reserves and the world’s fastest-growing economy, India checks all the right boxes of a responsible and creditworthy lender. India currently has a large focus on infrastructure development which is expected to unlock even more growth potential in an already booming economy. As a result, the Indian bond market is projected to expand close to 13 percent over the next 15 years.⁵ During this time, India will face the challenge of balancing domestic growth drivers and increasing leverage, being careful not to take on too much debt, like many of its more developed counterparts.


The Organisation for Economic Cooperation and Development (OECD) recently warned that the global economy could be slipping into a “low-growth trap” that will keep interest rates at record-low levels for years to come, and this should be a major concern for investors. With growth stunted in the developed world, and yield equally as hard to come by, emerging market and Indian bonds, in particular, are a viable option to help avoid this spiral of low growth.


¹ Moody’s Investor Services data, as at December 31, 2015.
² Careratings, Indian Bond Market: Striking a Chord with Asian Peers, June, 2014.
³ Bloomberg data, accessed on September 6, 2016.
⁴ Bloomberg Business, India’s Forgotten 8% Yielding Bonds Seen Luring Foreigners, August 25, 2016.
⁵ Credit Suisse, Emerging Capital Markets: The Road to 2030, July, 2014.

All statements in this report, other than statements of historical fact, and including statements regarding the future economic effects of events, are “forward-looking statements”. These forward-looking statements reflect the current beliefs of Excel Funds Management Inc. and are based on information available as of the date of this report. Actual results may differ materially as they are subject to a number of significant risks and uncertainties. Excel Funds Management Inc. has no obligation to update or revise the forward-looking statements in this report.



 

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