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Informist, Tuesday, Jul 16, 2024

By M.C. Adhiinthran

MUMBAI – Government bond prices ended higher today as investors stepped up purchases, especially of the short-term papers for their asset-liability management needs, dealers said. The 10-year benchmark 7.10%, 2034 bond ended at 100.94 rupees, or 6.96% yield, against 100.85 rupees, or 6.98% yield, on Monday. 

"Private banks and FPIs (foreign portfolio investors) I think bought today," a dealer at a state-owned bank said. "PSUs (state-owned banks) were the sellers today, booking profits." State-owned banks were the top net sellers on Monday, data from the Clearing Corp of India Ltd showed. 

Bond purchases for meeting asset-liability management needs were concentrated in the 7.37%, 2028 and 7.32%, 2030 papers, dealers said. With liquidity in the banking system remaining in surplus, short-term bonds became lucrative, dealers said. The liquidity surplus in the banking system narrowed to 828.75 bln rupees on Monday, data from the Reserve Bank of India showed. Liquidity has been in a surplus since the start of the month. The spread in yields between the 7.37%, 2028 and the 7.10%, 2034 bonds widened to 4-5 basis points today from 2-3 bps on Friday. 

Meanwhile, gains were led by long-term bonds like the 7.18%, 2037 bond and 7.23%, 2039 bond. Some said that domestic investors also stepped up purchases of those bonds as the longer-end of the yield curve is almost flat, making the 2037 and 2039 bonds lucrative. Recent issuances of infrastructure bonds also weighed on long-term bond yields. 

Others said that with bets on a rate cut by September in the US firming up, foreign portfolio investors bought the bonds expecting India to follow suit by December. Rate cut bets in the US strengthened after Federal Reserve Chair Jerome Powell said recently that rate cuts cannot wait until inflation hits 2%. 

"Better price action on duration papers and those two bonds have good volumes," a dealer at a primary dealership said. "This would be a good time to buy if they are expecting rate cuts in December."  

Powell indicated that the central bank is looking for "greater confidence" that inflation will drop to the 2% level, citing "long and variable lags" in policy effects. This comes after last week's inflation data, which saw an unexpected decline in CPI inflation data, while the producer price index came in hotter than expected. The CPI inflation fell 0.1% in June from May and was 3% higher on an annual basis. Wholesale prices climbed 0.2% in June from the previous month, above the forecast of 0.1% rise.

"The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%," Powell said. 

The comments also led to the yield on the benchmark 10-year US Treasury note falling to 4.18% from 4.23% at the time the Indian market closed on Monday, lending some intraday trading cues to domestic bonds. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors. 

Some expect a possible reduction in the government's fiscal deficit target to 4.9% of GDP from 5.1% of GDP due to the surplus transfer of the RBI, dealers said. The central bank transferred 2.11 trln rupees as surplus to the government, more than double the 1.02-trln-rupee amount that the Interim Budget had projected as the government's income from dividends of the RBI and state-owned banks. 

However, the government might spend some of the additional funds to regain some of its lost popularity. Most see spending in the Union Budget, due to be presented on Jul 23, being focused on populist schemes after the Bharatiya Janata Party failed to secure an absolute majority in the recent Lok Sabha elections, for the first time in a decade. 

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 649.00 bln rupees, higher than Monday's turnover of 436.10 bln rupees. Today, two trades worth 200 mln rupees were carried out using the wholesale digital rupee pilot, against no trades on Monday.

OUTLOOK

Money markets are shut on Wednesday on account of Muharram. Government bond prices are seen opening steady on Thursday amid a lack of domestic cues, dealers said. The market may take cues from US data like monthly sales for retail and food services in June and import and export price indices for last month. Both data points are due post market hours today. 

Dow Jones expects overall sales to fall 0.4% on-month, against a rise of 0.1% in the previous month. Import prices are seen falling 0.2%, against a 0.4% fall in the previous reading. Moreover, US Fed official Christopher Waller is set to speak on Wednesday, which may lend cues to swap rates.  

Any sharp movement in US Treasury yields and crude oil prices may also lend cues at the opening. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.95-7.02% during the day.

India Gilts: Remain up; traders bet on cut in FY25 fiscal deficit aim

MUMBAI--1437 IST--Prices of government bonds remained higher as traders anticipated a downward revision in the government's fiscal deficit target for 2024-25 (Apr-Mar), dealers said. An intraday drop in US Treasury yields also supported gilts prices.

The government has pegged the fiscal deficit target for 2024-25 at 5.1% of GDP. In the upcoming Budget, the market expects the government to cut the fiscal deficit target to 4.9% of GDP. "Fiscal deficit will see a reduction of 20 bps (basis points) from the current target," a dealer at a primary dealership said. "Easing in US yields has also pushed the prices."

The central government will detail its fiscal deficit target along with the Union Budget for 2024-25 (Apr-Mar), scheduled to be tabled on Jul 23. 

In the secondary market, mutual funds and private banks were seen on the buying side, while state-owned banks were seen selling government bonds at a profit. In addition to state-owned banks, foreign banks, which have bought gilts in past trading sessions, were selling government bonds, dealers said.

State-owned banks were selling the 10-year benchmark, 7.10%, 2034 bond, while stepping up their purchases in short-term securities for their asset-liability management, dealers said. 

On the global front, the yield on the benchmark 10-year US Treasury note fell to 4.18% from 4.22% in early trade and 4.25% at the time the Indian market closed on Monday. US yields inched lower as US Federal Reserve Chair Jerome Powell said the central bank would not wait until inflation hits 2% to cut interest rates.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 457.45 bln rupees, against 243.45 bln rupees at 1430 IST on Monday. For the rest of the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.95-6.99%. (Anupreksha Jain)

India Gilts: Rise on investors' buys; gains led by short-term bonds

MUMBAI--1207 IST--Prices of government bonds rose, supported by demand for short-term bonds from investors for their asset-liability management needs, dealers said. Foreign investors also stepped up purchases in the secondary market.

"If foreign portfolio investors are buying, then their fund managers are just gaining exposure and trying to match the duration," a dealer at a primary dealership said. "It could be foreign bank buys also. Recently, we have seen a lot of banks buying short-term bonds for their ALM (asset-liability management)."

Foreign portfolio investors bought short-term bonds which are part of the securities eligible for JP Morgan's Government Bond Index – Emerging Markets, dealers said. FPIs likely bought short-term bonds, betting on a rate cut by the US Federal Reserve in September, they added. According to CME FedWatch Tool, interest rate traders now see a 100% chance of an at least 25-basis-point rate cut by September, against 75% a week ago.

Investors such as banks also bought short-term papers for their asset-liability management needs, dealers said. The buying pattern in the secondary market remained similar to that on Monday. In the week so far, the yield spread between the benchmark 7.37%, 2028 bond and 7.10%, 2034 bond widened to 5 bps, from 1-2 bps last week.

US Treasury yields also inched down further, lending positive cues to the market, dealers said. The yield on the benchmark 10-year US Treasury note fell to 4.20% from 4.22% in early trade and 4.25% at the time the Indian market closed on Monday. US yields inched lower as US Federal Reserve Chair Jerome Powell said the central bank would not wait until inflation hits 2% to cut interest rates.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 271.35 bln rupees, against 58.15 bln rupees at 1130 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.96-6.99%. (Nishat Anjum)

India Gilts: In thin band as market lacks significant domestic cues

MUMBAI--0920 IST--Prices of government bonds were in a thin band as the market was devoid of any significant cues on the domestic front, dealers said. A fall in US Treasury yields kept gilts afloat.

"There are no cues in the market. US yields have barely moved. And the SDL (state government securities) amount is also small, it is unlikely to have a surprise in the auction," a dealer at a private bank said.

Six states will raise 65.90 bln rupees through the sale of bonds, with the auction scheduled from 1030 IST to 1130 IST. The amount is much lower than the indicative calendar for state borrowing for Jul-Sep, which showed states would borrow 129.90 bln rupees.

The next important cue for the market on the domestic front is the annual Budget for 2024-25 (Apr-Mar), scheduled to be tabled on Jul 23, dealers said. The market is likely to trade in a narrow range till then. The yield on the benchmark 7.10%, 2034 paper may trade in the 6.96-7.00% range, they added.

The market has factored in a slight reduction in borrowing for the current financial year, dealers said. It expects a minimal cut of 200 bln-300 bln rupees. In the interim Budget, the government pegged the gross borrowing at 14.13 trln rupees.

However, there is a section of the market that thinks that if there is a borrowing cut to be announced, it will be towards the end of the financial year, dealers said. They said it is then the government will have a clearer picture of how the borrowing has panned out, while at the time of the upcoming Budget, even half of the target amount would not have been borrowed.

Meanwhile, the yield on the benchmark 10-year US Treasury note fell to 4.22% in early trade from 4.25% at the time of the Indian market close on Monday.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 50.10 bln rupees, against 29.00 bln rupees at 0930 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.96-7.00%. (Nishat Anjum)

India Gilts: Seen opening steady on lack of firm domestic cues

MUMBAI – Prices of government bonds are seen opening steady as traders may refrain from placing aggressive bets in early trade due to a lack of firm domestic cues, dealers said. A slight overnight fall in US Treasury yields may keep the gilts afloat. The yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.96-7.01%, against 6.98% on Monday.

The yield on the benchmark 10-year US Treasury note fell to 4.22% in Asian trade from 4.25% at the time of the Indian market close on Monday. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors. 

The market may also derive positive cues from recent comments by US Federal Reserve Chair Jerome Powell on rate cuts, dealers said. However, the extent of it may be limited as the benchmark 10-year US yields still hovered above 4.20%, they added.

At an event in Washington, DC, Powell said that the US central bank will not wait until inflation hits 2% to cut interest rates. He indicated that the central bank is looking for "greater confidence" that inflation will drop to the 2% level, citing "long and variable lags" in policy effects.

This comes after last week's inflation data, which saw an unexpected decline in CPI inflation data, while the producer price index came in hotter than expected. CPI inflation fell 0.1% in June from May and was 3% on an annual basis. Wholesale prices climbed 0.2% in June from the previous month, above the forecast 0.1% rise.

"The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%," Powell said. Following the comments, markets now see a 100% chance of a rate cut in the US by September, against 75% a week ago, according to the CME FedWatch Tool.  (Nishat Anjum)

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Tanima Banerjee

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