Will US debt money come to India?

US investors are moving away from high-risk assets to low risk assets, say analysts. So, how does this affect India? CNBC-TV18 reports.

There has been quite a lot of action in the US short-term debt funds, say analysts. Some funds that are not exposed to sub-prime are also facing a lot of trouble, because investors have become paranoid to buy into these funds.

People are not even buying into funds, which have mortgages and whose credit score is greater than 700, say analysts. So, these funds are going through a chaotic situation.

These funds have started extending maturity on commercial paper by almost 30-45 days, which has happened for the first time in 12 years, since these securities have started. If the commercial paper goes above 270 days, then that will have to be registered with the SEC, which implies that there is more costs that goes into these commercial paper, they added.

If reports are indicative, there are funds which need to pay back almost $550 billion in the next 90-days. If these funds don't get new buyers, then it is going to be a buyers market. They will have to be sold at any rate that the buyers would ask. So, there is a lot of confusion, which is happening in the money market funds.

A lot of investors in the US are pulling out of money market funds and are buying into more stable low risk US treasuries, say analysts. If you look at the yields on US treasuries over the last one-month, the yield on the 13-week US treasury has gone down by almost 150 bps from 4.82 per cent to 3.3 per cent. So, is the case with the two-year bond, which has lost almost three-fourth of a percent from 4.76 per cent to 4.05 per cent. A similar scene is being seen with other notes like the five and 10-year note.

The spread between the two-year and 10-year bond, which was almost 19 bps points about one-month back, is currently at 54 bps. This means that US investors are seeking more compensation for holding longer-term maturities than what they were asking before. The yield curve has also steeped because of this.

Usually, the economic theory might suggest that it is good for the economy in the long-tem but the market should not be premature in drawing such conclusions. It should wait for the Fed cut that is going to be announced in September as most market players believe, say analysts. So, we need to wait for such a conclusion to draw out.

So, does it affect Indian investors? The answer is yes and no. No in case of credit market as our 10- year bonds has been holding quite steady. The yield has been just short of 8 per cent over the last few days. It might be a good indicator to keep tracking the US markets as low risk investors might pull out money from the US markets and pump it into more risky assets like the US and Indian equities among others, they added.