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Informist, Thursday, Jul 18, 2024

By Aaryan Khanna

NEW DELHI – Government bond prices ended on a mixed note. Long-term bonds were a tad lower on caution ahead of the weekly gilt auction on Friday and the presentation of the Union Budget for 2024-25 (Apr-Mar). Short-term bonds ended with slight gains as a large liquidity surplus persisted in the banking system, dealers said.

The 10-year benchmark 7.10%, 2034 bond ended at 100.91 rupees, or 6.97% yield, against 100.94 rupees, or 6.96% yield, on Tuesday. Money markets were shut on Wednesday for Muharram.

Trade was volatile, which led to an increase in volumes, but concentrated in a thin price band. Foreign banks and private banks stocked up on gilts maturing below seven years, with the 7.06%, 2028 bond managing to hold onto gains as it was favoured in asset-liability management. Many other current and former 3-5 year benchmark bonds also saw slight gains, though they ended off highs. The floating rate bond 2028 emerged as the third-most traded gilt as investors sought to lock in the 7.44% return it offered, over 50 basis points higher than the benchmark 7.37%, 2028 gilt.

Short-term bonds were also in favour as traders looked at the US rate trajectory. US Federal Reserve Chair Jerome Powell said earlier this week that the US Federal Open Market Committee may not wait for inflation to reach its 2% aim before cutting interest rates, which have been unchanged for over a year. Fed funds rate traders now see a 98% chance of a rate cut in the US by September, against 74% a week ago, according to the CME FedWatch Tool. Moreover, the liquidity surplus in the banking system was 1.15 trln rupees on Wednesday, with a consistent surplus through all of July, according to Reserve Bank of India data.

A September rate cut in the US is seen translating to a rate cut in India in December, which has not been priced into the market, dealers said. Moreover, with liquidity comfortable, traders could make bets on easing monetary conditions without a high cost of leveraging their portfolios. The weighted average triparty repo rate, which is tracked for bond repo trades to generate cash, has remained under the repo rate of 6.50% over the last week.

On the other hand, state-owned banks and primary dealerships continued to trim their holdings around the psychologically crucial 6.95% mark on the 10-year gilt. Traders made room for the weekly bond auction on Friday, with the government scheduled to sell 200 bln rupees of the 7.10%, 2034 bond and 110 bln rupees of the 7.46%, 2073 gilt. For the domestic banks, there was also an element of profit booking, though the gains were likely meagre, dealers said.

"The market has, in price terms, not been able to break the 100.94-rupee level (on the 7.10%, 2034 bond) over the last two days," a dealer at a state-owned bank "If this level breaks at any point, we could see sellers turn to buyers."

Other traders were more sanguine on the US rate view, and bet that there would be no US rate cut in September, as chances of former president Donald Trump winning the US presidential elections in November have increased following a failed assassination attempt on him. Investors expect that Trump coming to power would mean lower corporate taxes and stricter trade relations, leading to higher bond yields. Trump's policies are considered inflationary and pro-growth. In an interview earlier this week, Trump warned the Fed should hold off on interest rate cuts before the election in November.

Moreover, RBI Governor Shaktikanta Das has said India need not follow the US on interest rate cuts. In recent public comments, he has reiterated that CPI inflation in India remains well above the central bank's 4% target and the last mile of disinflation looks sticky. India's CPI inflation was higher than expected in June, hitting a four-month high of 5.08% from 4.80% in May.

Despite the governor's cautious tone, supply-demand dynamics still suggest that bond yields will fall rather than rise, dealers said. Most sections of the market want to go into the Budget heavily invested as they expect positive news on the fiscal consolidation path. The market has largely discounted that the government will reduce the fiscal deficit target for 2024-25 to 4.9-5.0% of GDP, from 5.1% of GDP in the Interim Budget, dealers said.

"Hunting for carry will become one of the primary concerns for investors once rate cuts start," a debt investment head at a mutual fund said. "At the current juncture, nobody will let go of opportunities to stock up. A rethink on allocations will only happen after the Budget."

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 636.55 bln rupees, similar to the trade volume of 649.00 bln rupees on Tuesday. Today, four trades worth 300 mln rupees were carried out using the wholesale digital rupee pilot, against two trades worth 200 mln rupees on Tuesday.

OUTLOOK

Government bond prices are seen opening steady on Friday on caution ahead of the weekly gilt auction at 1030-1130 IST. The government will sell 200 bln rupees of the 7.10%, 2034 bond and 110 bln rupees of the 7.46%, 2073 gilt.

RBI Governor Shaktikanta Das is scheduled to speak at an event at 1030 IST on Friday. His comments may also change traders' views on India's interest rate trajectory, and lend cues to gilt prices, dealers said. Except for triggers from these two events, dealers expect bond prices to trade in a narrow band before Finance Minister Nirmala Sitharaman presents the Union Budget in Parliament on Tuesday.

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 6.94-7.01% during the day.

India Gilts: Remain in thin band; mkt awaits key domestic cues

MUMBAI--1427 IST--Prices of government bonds remained in a thin band as traders lacked interest in placing aggressive bets ahead of the weekly gilt auction, scheduled on Friday. Moreover, traders are cautious in the run-up to the Union Budget for 2024-25 (Apr-Mar), dealers said.

At the auction, the government will sell 200 bln rupees of the 7.10%, 2034 bond and 110 bln rupees of the 7.46%, 2073 bond this week. Usually, primary dealers trim their holdings to make room for buying gilts at the auction, which was also happening today, dealers said.

Traders are expecting the upcoming auction to sail through, dealers said. The 10-year benchmark 7.10%, 2034 bond is likely to see a robust demand from every segment of the market, such as state-owned banks, private banks, and mutual funds. Meanwhile, the long-term bond, 7.46%, 2073 bond, is likely to be bought by insurers and pension funds.

Most sections of the market want to go into the Budget heavily invested as they expect positive news on the fiscal deficit number. The market has largely priced in that the government will reduce the fiscal deficit target for 2024-25 to 4.9-5.0% of GDP, from 5.1% of GDP in the Interim Budget, dealers said.

"Budget is the most important cue for the market," a dealer at a private bank said. "Whatever positioning we are doing we are keeping Budget in mind. We are just hoping that nothing should come against what the market is expecting."

Some short-term bonds held onto intraday gains, though there was a section of the market that sold the gilts after a rise in prices intraday, dealers said. Some traders were of the view that there would be no US rate cut in September, as chances of former president Donald Trump winning the US presidential elections in November have increased following a failed assassination attempt on him.

Investors expect that Trump coming to power would mean lower corporate taxes and stricter trade relations, leading to higher bond yields. Trump's policies are considered inflationary and pro-growth. A rate cut of at least 25-basis-point is almost fully factored in to US Treasury yields, which have fallen 21 bps this month.

"Therefore, the US Fed may not go for a rate cut and if inflation bounces back, they can't hike the rate again," a dealer at another private bank said. "The views regarding the rate cut are mixed. They cannot pause in between, so we honestly can't say for sure from here the market will go in what direction."

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 472.45 bln rupees, against 445.45 bln rupees at 1430 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.00%. (Anupreksha Jain)

India Gilts: Tad up; hope of Sep rate cut in US aids short-term bonds

MUMBAI--1202 IST--Prices of most government bonds rose slightly on increased hopes of rate cuts in the US by September, which, in turn, is seen leading to a cut in the domestic policy rate beginning December, dealers said. This has resulted in a pickup in demand for short-term securities.

US Federal Reserve Chair Jerome Powell said earlier this week that the US Federal Open Market Committee may not wait for inflation to reach its 2% aim before cutting interest rates, which have been unchanged for over a year. Fed funds rates traders now see a 98% chance of a rate cut in the US by September, against 74% a week ago, according to the CME FedWatch Tool.

Moreover, the liquidity surplus in the banking system was 1.15 trln rupees on Wednesday, according to the Reserve Bank of India data. The comfortable liquidity added to the demand for short-term bonds. Liquidity has been in surplus throughout July, and the surplus has averaged nearly 1 trln rupees over the past two weeks.

Foreign investors and foreign banks bought short-term securities, and even private banks were seen picking short-term bonds for their asset and liability management needs. There was also a positive outlook that yields may not harden much from their current levels, as the RBI is likely to continue allowing monetary conditions to ease, dealers said.

"It seems rate cuts are very near, especially after Powell's comments," a dealer at a primary dealership said. "Positive outlook about rate cuts, softening of US yields, and widening of the liquidity surplus has led to decent demand in short-term bonds."

On the other hand, state-owned banks sold gilts at a profit, while primary dealers trimmed their holdings in the 10-year benchmark, 7.10%, 2034 bond, ahead of the weekly gilt auction on Friday. At the auction, the government will sell 200 bln rupees of the 7.10%, 2034 bond and 110 bln rupees of the 7.46%, 2073 bond this week.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 357.65 bln rupees, against 292.65 bln rupees at 1230 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.00%. (Anupreksha Jain)

India Gilts: Steady on lack of cues; FY25 Budget next week awaited

NEW DELHI--0940 IST--Prices of government bonds were largely steady as traders avoided large bets, focusing on the presentation of the Union Budget for 2024-25 (Apr-Mar) on Tuesday for cues, dealers said.

The government's gross borrowing target for the current financial year is 14.13 trln rupees, as outlined in the Interim Budget presented on Feb 1. The market has discounted a gross borrowing cut of around 250 bln rupees in the Budget, with further cuts possible if the government brings down its fiscal deficit aim to 4.9% of GDP from 5.1% of GDP outlined in the Interim Budget, dealers said.

The fall in US Treasury yields over the last week has also helped bond prices consolidate as expectations of a US rate cut in September have firmed up. This has led to some traders preferring short-term gilts over longer-dated paper on the view that domestic monetary policy will also ease following the US, dealers said. Markets now see a 98% chance of a rate cut in the US by September, against 74% a week ago, according to the CME FedWatch Tool.

"The levels are supported because people are pricing in a fiscal deficit of 5.0% (of GDP) in the Budget," a dealer at a state-owned bank said. "The selling pressure is still there from state-owned banks, and they will try to eke out even a few paise of gains in their held-for-trading books."

However, with bond prices up this week despite a higher-than-expected CPI inflation print for June, traders have added a lot of risk to their portfolios heading into the Budget. Some traders booked profits, while others trimmed their holdings ahead of the weekly gilt auction on Friday. The government will sell 200 bln rupees of the 7.10%, 2034 bond and 110 bln rupees of the 7.46%, 2073 bond this week.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 85.05 bln rupees, against 61.65 bln rupees at 0930 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.00%. (Aaryan Khanna)

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 due to a lack of firm domestic cues, dealers said. Profit-booking may kick in if prices move further, while hopes of impending interest rate cuts will prevent a sharp fall, they said.

The yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.00%, against 6.96% on Tuesday. Money markets were shut on Wednesday on account of Muharram.

The Union Budget for 2024-25 (Apr-Mar), scheduled to be tabled on Tuesday, is the only important cue for the market on the domestic front. The market is likely to trade in a narrow band till then, with the 10-year benchmark yield seen in the range of 6.95-7.00%, dealers said.

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 believes that if a borrowing cut is to be announced, it will be towards the end of the financial year rather than in the Budget.

Dealers said this would accompany a downward revision in the fiscal deficit aim to around 4.9% of the GDP in 2024-25 from 5.1% of GDP in the Interim Budget. In the previous financial year ended March, India's fiscal gap was 5.6% of GDP, 20 basis points lower than the revised estimate in the Interim Budget.

The market may continue to derive positive cues from recent comments by US Federal Reserve Chair Jerome Powell on rate cuts, dealers said. At an event in Washington, DC, Powell said 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.

Following the comments, markets now see a 98% chance of a rate cut in the US by September, against 74% a week ago, according to the CME FedWatch Tool. US Treasury yields have largely factored in the view, and the yield on the benchmark 10-year US Treasury note remained largely unchanged at 4.17% from the time the Indian market closed on Tuesday.  (Anupreksha Jain)

End

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

Edited by Deepshikha Bhardwaj

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