Moody's rating upgrade brings optimism to bond market, yields seen stable

Reacting positively to Moody's upgrading India's sovereign rating, government bonds on Friday pared some of their recent losses during the session, before ending nearly flat.

The 10-year benchmark bond yield opened at 6.94 percent on Friday, 12 basis points higher than its previous close, and ended nearly flat at 7.05 percent.

Rating agency Moody's on Friday upgraded India's sovereign debt rating to Baa2 from its lowest investment-grade rating of Baa3 earlier, attributing the revision to the Narendra Modi government's “wide-ranging program of economic and institutional reforms”. This was the first instance of an upgrade in India's sovereign debt rating since 2004.

Market participants said that although banks and corporates bought bonds heavily early on in the session, uncertainty about yields going forward pushed a lot of investors to book profit as soon as the opportunity presented itself.

However, most of them were of the opinion that the positive cues from the rating upgrade were enough to stabilise yields for the moment, putting an end to the current bear run.

"The concerns that have affected the bond market in recent times have been about India's economic health," said a dealer at a domestic bank. "And there is nothing better to address those kind of concerns than a sovereign rating upgrade."

However, the rating upgrade is not expected to boost foreign institutional investment in the bond market since FIIs are already heavily invested in India with an aim to benefit from the carry trade opportunity available here.

Moreover, although this would be enough to give some sort of a breather to people who had long positions before the upgrade, investors are unlikely to take fresh long positions in this market given the multitude of factors that could have a negative bearing on Indian bonds.

The biggest question mark is the one around global bond yields. Most major central banks around the world have already made clear their intention to reduce the size of their balance sheets by selling the excess bond holdings they accumulated in the aftermath of the 2008 financial crisis and the European debt crisis.