Rising US Treasury Yields & Lower IGB Yields have kept the IGB/UST spread very low. Presently, last 5 years average spread has reduced to 315bps as against the 464bps seen on 31st March 2023. Since spread is narrowing, participation from FPIs have come down further during the intervening period.
We will continue to see such low participation from FPIs till spread between IGB and UST continue to stay compressed.
Moreover, Forward premia between USD and INR are also trading at lower levels due to same reasons.
If we believe that the current low spread is not justified then either UST or Indian Government Security is mispriced.
I understand that rise in US Treasury’s yield may be justified due to aggressive rate hikes and hawkish tone of FED to hike rates further to tame sticky inflation. 10 Year US Treasury yield has been risen by appx 160bps from 31st March’22 level where as 10 Year Indian Government Bond yield rose by 26bps only in the same period despite 250bps rate hike by the RBI and used various market tools to keep the liquidity tight.
I believe, IGB is overvalued as compared to UST which could be the reason for low participation by FPIs in Indian Govt Bond Market.
