India-US 10-yr bond yield spread at near 14-yr low; likely to widen

The spread between the Indian and U.S. 10-year bond yields dropped to its lowest level in nearly 14 years, but it cannot remain this low for too long and could reverse over the coming weeks, analysts said on Thursday.

India’s benchmark bond yield has hovered around 7% for the last few days, and the U.S. yield rose to around 3.75% in the past two weeks, shrinking the spread to 325 basis points (bps), levels last seen in August 2009.

“The current spread is not sustainable. This spread is a function of the 10-year bond yield remaining over-valued for quite some time,” said Mataprasad Pandey, vice president at Arete Capital.

“Local bond yields are near their bottom, and should see an uptick towards the 7.10%-7.12% zone. Yields are unlikely to make a fresh bottom, and 6.95% should act as strong resistance at least for the current quarter,” said Vijay Sharma, senior executive vice president at PNB Gilts.

U.S. yields have risen sharply in the past few days as talks over debt ceiling persists, while hawkish commentary from Fed officials has led to a selloff in treasuries, while local fundamentals have been supportive for Indian government bonds, pushing the benchmark yield below 7%.

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