Indian dollar-bond yields are headed for their biggest monthly increase since the height of the European debt crisis in May, putting a brake on the record pace of issuance in the U.S. currency. The combination of rising Treasury yields and concern that emerging-market policy makers will struggle to control inflation caused the average Indian corporate debt yield in HSBC Holdings Plc’s Asian Dollar Bond index to rise 32 basis points, or 0.32 percentage point, this month. The average yield in the Merrill Lynch U.S. Treasury Master index climbed 15 basis points. Dollar bond sales in India quadrupled this year to $10.4 billion as companies including Reliance Industries Ltd. and ICICI Bank Ltd. took advantage of a drop in borrowing costs to a record low last month. As dollar debt yields climb in Brazil, Russia, India and China, State Bank of India Deputy Managing Director Pratip Chaudhuri said yesterday that the lender plans to sell bonds denominated in euros next week. “Indian issuers are very price sensitive and every basis point makes a difference for them,” Pierre Faddoul, a credit analyst at Aberdeen Asset Management Asia Ltd., said in a phone interview from Singapore. “If they anticipate further U.S. yield rises I wouldn’t be surprised if we see more companies taking this opportunity to tap the market in Europe.” Yields in the U.S., the world’s biggest economy, have climbed on speculation efforts by the Federal Reserve to spur the economy will lead to faster inflation. The 10-year Treasury yield rose yesterday to more than 2.82 percent, a two-month high. There have been 292 dollar bond sales in India this year compared with 127 in the same period of 2009, data compiled by Bloomberg show. ‘Missed the Boat’ Axis Bank Ltd.’s 5.25 percent notes due in September 2015 were the worst performers in HSBC’s index in the past month, rising 37 basis points, followed by IDBI Bank Ltd.’s 4.75 percent notes due in February 2016, which climbed 42 basis points, according to data compiled by Bloomberg. “There’s a risk that if we see Indian bonds continue to track U.S. bonds and yields move higher, which is our house view, companies may have missed the boat” on new sales, Mitul Kotecha, the head of global foreign exchange strategy at Credit Agricole CIB said in a phone interview from Hong Kong. “Issuance won’t dry up as a result of this but certainly you may not see the level of activity seen before.” Euro Sales State Bank of India, the nation’s largest lender, plans to raise 500 million euros selling five-year debt next week, Chaudhuri said in an interview. Last week, State Bank of India hired six banks to arrange meetings with bond investors in Europe, two people familiar with the matter said Nov. 11. Reliance Communications Ltd.’s Flag Telecom unit may raise at least $500 million by tapping the euro bond market, the Economic Times newspaper said yesterday, citing banking executives it didn’t identify. The last time an Indian company sold euro-denominated debt was July 2007 when Chennai-based information technology firm Gemini Communications Ltd. offered 15 million euros ($20.5 million) of 6 percent convertible notes due July 2012, the data show. “Investors like the Europeans and Japanese would be happy to buy non-dollar denominated bonds from Indian borrowers,” said Ajay Mahajan, managing director at UBS AG in Mumbai. “Non- dollar borrowing suits companies when they spot investors keen to diversify their holdings away from traditional assets like dollar bonds.” The yield on India’s benchmark 10-year notes fell 2 basis points yesterday to 8.07 percent, versus 8.11 percent at the end of October. The rate is 523 basis points more than similar- maturity U.S. Treasuries, down from 560 a month ago, according to data compiled by Bloomberg. Road, Rail Spending Spending on infrastructure in India should keep dollar bond sales buoyant even as yields rise, said Chia Woon Khien, the Singapore-based head of currency and rates strategy for Asia excluding Japan at Royal Bank of Scotland. India will need $1 trillion of investment in roads and ports between 2012 and 2017, double the estimated spending in the previous five years, to narrow the gap with China, according to Prime Minister Manmohan Singh’s government. China’s economy, which was about the same size as India’s in 1980, has swelled close to $5 trillion, four times that of India, after the government boosted public spending. “India is a very healthy economy and has a lot of growth,” Chia said. “Behind the infrastructure programs the government is pushing will be private sector ventures, and you can’t expect those companies to participate without raising funds.” Default Swaps The rupee fell for a third day to a seven-week low, trimming gains this year to 2.9 percent. The currency touched a two-year high on Oct. 15 as the central bank raised interest rates to curb inflation, attracting fund inflows. The currency dropped 1 percent yesterday, following a 1.1 percent slide the previous day after industrial production growth slowed to a 16- month low in September. The cost in the credit-default swaps market of protecting bonds of government-owned State Bank of India, which investors use as a proxy for the nation, has decreased 70 basis points to 169 from a one-year high reached in May, according to CMA prices. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. India’s dollar bond yields rose less than those in Brazil, Russia and China in the past week. India’s yield climbed 16 basis points to 4.79 percent, according to JPMorgan Chase & Co’s Asian Credit index. The yield for Brazil’s dollar bonds rose 21 basis points to 4.94 percent in the same period, Russia’s increased 25 points to 4.58 percent and China’s added 17 basis points to 1.77 percent, JPMorgan indexes show. “The reality is there’s little chance we’ll see bond yields remain well contained, while much lower yields are unlikely,” Credit Agricole’s Kotecha said. “We’re in for a period of volatility, which could slow the steady flow of issuance to some extent.” To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net

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