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Informist, Friday, Jul 19, 2024

By M.C. Adhiinthran

MUMBAI – Government bond prices ended largely steady today after the cut-offs at the gilt auction were along expected lines, dealers said. Prices fell in the first half of the day's trade ahead of the auction, and due to a slight overnight rise in US Treasury yields.

The 10-year benchmark 7.10%, 2034 bond ended at 100.93 rupees, or 6.96% yield, against 100.91 rupees, or 6.97% yield, on Thursday.

Today, the government sold 200 bln rupees of the 7.10%, 2034 bond and 110 bln rupees of the 50-year benchmark 7.46%, 2073 gilt at the auction. The results of the 310-bln-rupee bond sale were largely along expected lines, dealers said. Some dealers had been worried that traders would demand higher returns for the bonds at the debt sale, but investors picked up adequate stock for the auction to sail through.
 

The 50-year bond had large bids placed at auction from life insurers, dealers said. The central bank set a cut-off price of 104.98 rupees, or 7.09% yield. Pension funds also picked up a small amount. Around 15 bln rupees' worth of the bond was picked up at the auction for Separate Trading of Registered Interest and Principal Securities, or STRIPS. However, total bids accepted were limited, leading to some speculation whether a large state-owned insurer had taken most of the bond from the auction. Only 59 bids out of 252 were accepted at the auction.

This led to insurance companies buying the 7.30%, 2053 bond from the secondary market as it is the more liquid among bonds with maturity period 30 years or longer, making it easier to get, dealers said. The price of the 2053 bond jumped 13 paise after the results of the auction. Some dealers added that mutual funds may have bought the bond, continuing with their preference for longer-term bonds to lock in higher capital gains. All this made the 2053 bond the fourth most traded in the secondary market today.

The 10-year bond saw good demand from state-owned banks and private banks, dealers said. The Reserve Bank of India set a cut-off price of 100.83 rupees, or 6.98% yield, on the bond, in line with the median estimate in an Informist poll. "Total bids accepted were not that great (for the 7.10%, 2034 bond)," a dealer at a primary dealership said, "50% acceptance for a 10-year bond is usually not a good thing, which is why secondary market saw a recovery." Out of 378 bids, 146 were accepted at the auction.

Foreign portfolio investors bought the bonds up for auction today, dealers said. In the reported deals segment of the RBI's Negotiated Dealing System–Order Matching platform, which is usually used as a gauge to check FPI buys saw trades worth 51.50 bln rupees of the auctioned bonds today.

Some of the bond purchases in the secondary market were from banks that were looking to get ahead of the Budget, dealers said. The Budget proposals will be detailed on Tuesday. A potential borrowing cut in the Budget of around 250 bln rupees from the gross borrowing aim of 14.13 trln rupees outlined in the Interim Budget is expected, dealers said. An Informist poll also showed that the fiscal deficit aim is seen being lowered to 5.0% of GDP from 5.1% of GDP in the Interim Budget. This means buying bonds now would be lucrative, dealers said.

With firm demand at the auction, bonds recovered all losses caused by the rise in US Treasury yields earlier, dealers said. The yield on the 10-year benchmark US Treasury note rose to 4.21% from 4.19% at the time the Indian market closed Thursday. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors.

US yields inched higher from multi-month lows after comments from a US Federal Reserve official. San Francisco Fed President Mary Daly said Thursday that while recent inflation data has been positive, "we're not there yet" on achieving price stability. Daly is a voting member of the US Federal Open Market Committee in 2024.

On interest rates on the domestic front, Reserve Bank of India Governor Shaktikanta Das said a neutral rate of interest is a theoretical, abstract concept and cannot determine policy in the real world. He spoke at the Financial Express Modern BFSI Summit in Mumbai today. The neutral, or natural, interest rate is the real rate of interest at which CPI remains constant and economic growth is at its potential.

The most recent discussion on neutral rates comes from the staff paper published by the central bank on Thursday, which said India's natural rate of interest rose to 1.4-1.9% during Jan-Mar from 0.8-1.0% in Oct-Dec 2021. The wide band of the neutral rate can be used to justify any position-–a rate cut or a hold-–favoured by members of the Monetary Policy Committee, dealers said. Moreover, it lends credence to RBI officials' view that there is no immediate need to cut rates, with the real interest rate-–the policy rate net of expected inflation in the current financial year-–working out to be 2.0%, just above the neutral interest rate in Jan-Mar. 

"It's a good discussion point, but it's not going to send rate expectations anywhere," a dealer at another primary dealership said. "The ones punting on a December rate cut will just point to that 1.4% estimate and say there's room for 50 bps of rate cuts immediately. Whereas at 1.9%, well, the repo rate's not going anywhere."

The recent CPI inflation data showed that inflation was at 5.08% in June, higher than 4.80% in the previous month. However, it was largely seasonal factors that had a bearing, like the rise in food inflation. Dealers believe the central bank's inflation target of 4.5% for the financial year can be achieved.

With the staff papers from the central bank released Wednesday also showing that CPI at 4% sustainably is not needed to change policy stance, bets for a rate cut and stance change by December firmed, dealers said. The paper also added that the Monetary Policy Committee must continue on its current path.

A stance change by August was not seen as possible as a more durable trend in inflation would be visible by December, dealers said. Additionally, a rate cut in India would not happen before the Fed cuts rates, which is currently being factored in for September, they added.

According to data on the RBI's NDS–OM, the turnover today was 424.40 bln rupees, lower than the trade volume of 633.90 bln rupees on Thursday. Today, four trades worth 300 mln rupees were carried out using the wholesale digital rupee pilot, same as Thursday.

OUTLOOK

Bonds are not traded on Saturdays. On Monday, government bond prices are seen opening steady on caution ahead of the Budget, dealers said. However, prices may rise if traders rush to buy bonds before the event, which will be detailed on Tuesday. A potential borrowing cut in the Budget of around 250 bln rupees from the gross borrowing aim of 14.13 trln rupees outlined in the Interim Budget is expected, dealers said. 

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: Recover all losses; banks buy bonds ahead of Budget

MUMBAI--1512 IST--Government bonds recovered all losses as traders rushed to the secondary market to buy bonds ahead of the Union Budget for 2024-25 (Apr-Mar) on Tuesday. Most traders did not get the 7.10%, 2034 bond from the gilt auction, dealers said.

The government today sold 200 bln rupees of the 7.10%, 2034 bond and 110 bln rupees of the 50-year benchmark 7.46%, 2073 gilt at the auction. The results of the 310-bln-rupee bond sale was largely along expected lines, dealers said.

The 10-year bond saw good demand from state-owned banks and private banks, dealers said. The Reserve Bank of India set a cut-off price of 100.83 rupees or 6.98% yield on the bond, in line with the median estimate in an Informist poll.

"There is a lot of budget buying in the market now," a dealer at a private bank said. "Yields are largely expected to fall, so it is a good time to buy. Auction cut-off was really cheap for 10-year, but now people are taking to secondary (market) so they make the most out of the Budget."

A potential borrowing cut in the Budget of around 250 bln rupees from the gross borrowing aim of 14.13 trln rupees outlined in the Interim Budget is expected, dealers said.

The 50-year bond had large bids placed at auction from life insurers, dealers said. The central bank set a cut-off price of 104.98 rupees or 7.09% yield. Pension funds also picked up a small amount. Around 15 bln rupees of the bond was picked up at the auction for Separate Trading of Registered Interest and Principal Securities, or STRIPS. However, total bids accepted were minimal, leading to some speculation on whether a large state-owned insurer took most of the bond from the auction. Only 59 bids out of 252 were accepted at the auction today, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 315.85 bln rupees, against 454.85 bln rupees at 1430 IST on Thursday. For the rest of the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.94-7.00%.  (M.C. Adhiinthran)

India Gilts: Tad lower; mixed views on demand for bonds at auction

NEW DELHI--1225 IST--Prices of government bonds remained slightly lower, with mixed feedback regarding demand at the 310-bln-rupee auction, dealers said. Demand for the 10-year benchmark 7.10%, 2034 bond was broad-based but not aggressive, and may lead to a lower cut-off price at auction than that prevailing in the secondary market.

The government offered 200 bln rupees of the 2034 bond and 110 bln rupees of the 50-year benchmark 7.46%, 2073 gilt at the auction. State-owned banks and private banks both cited interest in picking up the 10-year gilt. Foreign banks likely placed bids on behalf of clients for the 7.10%, 2034 bond, which has been underinvested in, dealers said. Clearing Corp of India shows foreign portfolio investors' holding in the 10-year benchmark was just 5.5% of its outstanding.

"The Budget is seen as a one-way ride to profit right now," a dealer at a private bank said. "No one can afford to sit on cash, you have to be invested – but your tenure picking will reflect your risk appetite."

Some banks would have preferred carrying gilts maturing up to seven years into the Union Budget for 2024-25 (Apr-Mar), but the auction lacked short-tenure bonds. Consequently, if their bids for the 2034 bond are accepted at the auction, they may trim holdings of the seven-year paper, dealers said. Bonds maturing in 10 and 40 years are also favourable as a potential borrowing cut in the Budget will likely cut supply in these bonds the most, they said. The market is currently pricing in a borrowing cut of around 250 bln rupees from the gross borrowing aim of 14.13 trln rupees outlined in the Interim Budget.

Meanwhile, the 50-year bond saw large bids at auction from life insurers primarily, with pension funds also likely to pick up a smaller amount, dealers said. While forward-rate agreements were not struck in large amounts, there was some demand from private life insurers for Separate Trading of Registered Interest and Principal Securities, or STRIPS. The 50-year paper typically does not see demand from this derivative instrument, but purchases worth around 15 bln rupees may come through for this at the auction, dealers said.

Meanwhile, comments from Reserve Bank of India Governor Shaktikanta Das at an event today did not have a large impact on bond prices. The governor reiterated that food inflation was a worry, and that the last mile of disinflation would be sticky and challenging. He has made similar comments in recent weeks, and his views were largely factored in, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 99.80 bln rupees, against 320.60 bln rupees at 1230 IST on Thursday. 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: Tad down in thin trade on rise in US yields, before auction

NEW DELHI--0940 IST--Government bond prices fell slightly as traders made room for fresh supply at the 310-bln-rupee weekly gilts auction, dealers said. An overnight rise in US Treasury yields also weighed on bond prices.

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. The 10-year benchmark gilt will be sought by investors across the board, especially with gilt yields seen falling after the Union Budget for 2024-25 (Apr-Mar) is presented on Tuesday, dealers said.

Traders have been able to drive the price lower as the 2034 bond has been unable to close above the 100.94-rupee mark, a technical positive that has eluded the market over the last two trading days, dealers said. This was despite foreign portfolio investors buying 25.50 bln rupees worth of gilts under the fully accessible route – which have no limits for foreign investment – on Thursday, according to Clearing Corp of India data.

At the auction, FPIs may choose to pick up the 10-year benchmark gilt and trim their holdings of the 7.18%, 2033 bond, which now sees limited trade on most days, dealers said. Foreign investors hold only 5.5% of the outstanding of the 2034 bond, while FPI holding in the 2033 bond is over 12.5% of its much larger 2-trln-rupee outstanding.

However, purchases by foreign banks may slow after the rise in US Treasury yields. US Federal Open Market Committee voting member Mary Daly said on Thursday that recent inflation readings have been very good, but the US central bank has not achieved price stability yet. The yield on the benchmark 10-year US Treasury note rose to 4.22% in Asian trade from 4.19% at the time of the Indian market close on Thursday.

"There's been some positivity (this week) after FPIs have begun coming in, and US yields have fallen. Some of that will obviously not play out today," a dealer at a primary dealership said. "They should still be there at the auction, at least for the 10-year paper. People just want to buy at a slightly cheaper price, otherwise the market's movement doesn't represent anything."

Comments by Reserve Bank of India Governor Shaktikanta Das at an event at 1030 IST will be keenly tracked for cues on the interest rate trajectory. Traders have begun placing bets on a rate cut by the RBI's Monetary Policy Committee in December, while Das has been adamant in recent remarks that it is too early to speak about rate cuts.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 31.35 bln rupees, against 62.50 bln rupees at 0930 IST on Thursday. 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 ahead of 310-bln-rupee gilt auction

MUMBAI – Prices of government bonds are seen opening steady as traders may refrain from placing aggressive bets ahead of the 310-bln-rupee weekly gilt auction, scheduled at 1030-1130 IST, dealers said. The yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.00%, against 6.97% on Thursday.

Comments from Reserve Bank of India Governor Shaktikanta Das at 1030 IST may also lend early cues to the market. The governor is scheduled to speak at the FE Modern BFSI Summit in Mumbai, and has in recent public statements pushed back expectations of a monetary policy stance change or a rate cut.

An RBI staff paper on Thursday said India's natural rate of interest – the real interest rate that is neither expansionary nor contractionary for the economy – rose to 1.4-1.9% during Jan-Mar from 0.8-1.0% during Oct-Dec 2021. Currently, the real interest rate is around 2.0%, when comparing the policy repo rate against the 4.5% CPI inflation projection by the central bank for 2024-25 (Apr-Mar).

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. Before the auction, primary dealers may continue to trim their bond holdings to make room for buying gilts at the auction, 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 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.

"As there is no short-term bond up for the auction, mutual funds, some private banks are likely to be there," a dealer at a private bank said. "Since the budget is next week, I do not think anyone would take aggressive positions despite anticipating positive news on the fiscal front."

The Union Budget for 2024-25 is scheduled to be tabled on Tuesday. 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 is anticipating a slight reduction in borrowing for the current financial year along with a downward revision in the fiscal deficit target to around 5.0% of GDP from 5.1% in the Interim Budget. 

Meanwhile, an overnight rise in US Treasury yields may also weigh on gilts, dealers said. The yield on the benchmark 10-year US Treasury note rose to 4.22% in Asian trade from 4.19% at the time of the Indian market close on Thursday. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors.

Investors assessed the remarks of various US Federal Reserve officials, who spoke on Thursday. San Francisco Federal Reserve President Mary Daly said that while recent inflation data has been positive, "we're not there yet". Daly is a voting member on the Federal Open Market Committee in 2024. Currently, markets now see a 96% chance of a rate cut in the US by September, a tad down from the day before, according to the CME FedWatch Tool.

However, rate cut hopes remained intact as the US unemployment data for the week ended Saturday showed that unemployment benefits rose more than expected, suggesting a slow-down in the labour economy. Fresh unemployment claims rose more than expected last week, while initial claims for state unemployment benefits rose 20,000 to a seasonally adjusted 243,000 for the week ended Jul 1. On the other hand, the Philadelphia Fed manufacturing index rose to 13.9 in July from 1.3 in June, hitting a three-month-high.  (Anupreksha Jain)

End

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

Edited by Rajeev Pai

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