Foreign investors have been aggressively unwinding their total return swap ((TRS) positions, which are mostly unhedged, due to the volatility in global bond yields ahead of the US presidential elections, traders said. In addition, with the rupee breaching the crucial mark of 84/$, foreign investors have resorted to booking profits.
For a second week in a row, foreign investors sold Rs 8.7 billion ($104 million) of the fully accessible route (FAR) government securities last week, according to the data from the Clearing Corporation of India. In the previous week, foreign investors withdrew $200 million from FAR securities, making the first net sales since the inclusion of government bonds into the JP Morgan’s Government Bond Index-Emerging Market Suite.
“People have invested a lot of money in government bonds in the last quarter, so they are booking profits right now. The 10-year US yield is close to 4% and weak domestic currency is also weighing on investors’ appetite. And also towards the year-end traders tend to book gains,” said Dhawal Dalal, president and CIO, fixed income, Edelweiss Asset Management.
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“TRS positions are mostly unhedged. Hence, weakening of rupee has dented investors’ confidence, prompting them to exit their positions,” a dealer with a foreign bank said.
TRS is an off-shore derivative instrument (ODI) by which global investors can invest in the G-sec market without being registered as foreign portfolio investors. The model lets an ODI provider buy a bond from India as a registered FPI and then enter into a TRS contract with an offshore client, hence passing on all the risks and returns in the bond. The derivative contracts have tenures ranging from one month to one year and the underlying investment could be in government bonds of any tenure.
Globally, traders have trimmed down their expectations of another deep cut in the US Federal policy rate, leading to an uptick in the US Treasury yields. A rise in US Treasury yields widens the interest rate differential between the safe-haven asset and emerging market debt, making latter less attractive to foreign investors. The spread between yields on the 10-year benchmark and the 10-year US Treasury yield has risen by 35 basis points from 3.78% as on September 30 to 4.13% on October 21,
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