Nomura Holdings Inc. is betting that the gap between Indian bond yields and swaps will widen irrespective of whether the nation’s debt is included in global indexes over the coming weeks.
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Nomura Holdings Inc. is betting that the gap between Indian bond yields and swaps will widen irrespective of whether the nation’s debt is included in global indexes over the coming weeks.
The investment bank has initiated a trade to receive five-year offshore swaps while shorting the 10-year government bonds, South East Asia and India rates strategist Nathan Sribalasundaram wrote in a note on Wednesday. It forecasts that the gap between bond yields and swaps will widen to 70 basis points by mid-November from the current 38 basis points.
The trade will be favorable both in case of index inclusion or non-inclusion because the offshore swap market has a wider set of investors compared to onshore, which means market moves overseas will be larger, according to Sribalasundaram. In case of non-inclusion, bonds would underperform due to their recent outperformance, he wrote.
Nomura’s trade recommendation comes amid growing buzz that India may finally be included in JPMorgan Chase & Co.’s emerging market bond index after Russia’s exclusion and growing geopolitical tensions around China. FTSE Russell is also scheduled to review its bond indexes on Sept. 28.
“While our base case remains that India is unlikely to be included just yet, our conviction on this scenario is low,” Sribalasundaram wrote. “The operational hurdles around trading India bonds remain, but do not make it impossible.”
The India bond-swap spread has narrowed significantly over the past few months and is currently trading well below the five-year average, according to Nomura.
Net supply of government bonds will drop in the second half of the fiscal year, but the weekly supply remains large around 350 billion rupees ($4.2 billion), it said. “This supply warrants a wider bond-swap spread and a steeper India government bond curve,” Sribalasundaram wrote.
–With assistance from Ronojoy Mazumdar.
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