FPI Trends Highlight Selling in Government Debt Due to US Federal Policy Rate Uncertainty

FPI Trends: Foreign Investors Sell Off Government Debt

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.

Key Trends in FPI Government Debt Activity

• 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 data from the Clearing Corporation of India.
• In the previous week, foreign investors withdrew $200 million from FAR securities, marking the first net sales since the inclusion of government bonds into JP Morgan's Government Bond Index-Emerging Market Suite.
• People have invested a lot of money in government bonds in the last quarter, prompting booking of profits in light of the **10-year US yield** nearing 4%.

Impact of US Federal Policy Rate and Currency Movement

As global traders revised their expectations for another deep cut in the US Federal policy rate, US Treasury yields are on the rise. This uptick widens the interest rate gap between safe-haven assets and emerging market debt, resulting in lower attractiveness for foreign investors.

1. Spread between yields on the 10-year benchmark and the US Treasury yield has increased by 35 basis points from 3.78% as of September 30 to 4.13% on October 21, according to Bloomberg data.
2. Recent polling data suggests that Donald Trump, a Republican presidential candidate, might win the upcoming elections, fueling beliefs of a shallow rate cycle.

The weakening rupee has dented investor confidence, prompting exits from their positions. Traders indicated that TRS positions, being mostly unhedged, are at significant risk under current market conditions.