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Informist, Thursday, Jul 25, 2024

By Nishat Anjum

MUMBAI – Prices of government bonds ended higher today tracking a fall in overnight indexed swap rates, dealers said. Moreover, as the yield on the 2-year US Treasury note inched down, it aided short-term gilt prices, they added.  

The 10-year benchmark 7.10%, 2034 bond closed at 101.02 rupees, or 6.95% yield, against 100.94 rupees, or 6.96% yield, on Wednesday.

Overnight indexed swap rates closed lower as offshore traders received fixed rates anticipating a rate cut in the US by September that may translate into a cut in the domestic policy rate by December, dealers said. Meanwhile, the 2-year US Treasury yield fell to 4.37% on Wednesday from 4.40% on Tuesday after strong demand for two-year notes at an auction, which also prompted offshore traders to receive fixed rates. The five-year swap rate ended at 6.22%, compared with 6.25% the previous trading day.

The positive sentiment around rate cuts, both in India and the US, has led to investors locking up the current yield levels, dealers said. In the secondary market, longer-tenure government securities saw an increased demand from foreign investors, insurers, and pension funds as the yield curve steepened, dealers said. Benchmark 7.18%, 2037 bond, saw traction from foreign investors as this security is classified under the fully accessible route.

The market expects the pace of foreign inflows to increase as the weightage of Indian government bonds increases going forward, dealers said. 

Following the inclusion of government bonds into the JP Morgan's Government Bond Market-Emerging Index last month, the weightage of bonds will be rebalanced on Friday and it will increase to 2%.

Today, state-owned banks and primary dealers were on the selling side, while private banks and foreign investors were seen on the buying side. Amongst on-the-run gilts, gains were limited on the benchmark 15-year, 7.37%, 2039 bond, as traders placed short bets ahead of the weekly debt auction on Friday, dealers said. At the auction on Friday, the government will sell 120 bln rupees of the 7.04%, 2029 bond, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.34%, 2064 bond. 

"Now that trade volumes have picked up in other papers, trading activity has increased there. Tomorrow (Friday), I expect good demand for the 15-year, given the outstanding shorts," a dealer at a primary dealership said. The volume of interbank repo trades in a given paper is a proxy for tracking the quantum of short bets, as overnight short sellers necessarily have to borrow the securities. On the Clearcorp Repo Order Matching System, the repo turnover for the 7.23%, 2039 bond was 44.61 bln rupees.

Meanwhile, short-term bonds, which in the recent past traders avoided piling up due to lack of cues on rate cuts, saw an uptick in trade volumes. 

This happened as the market is now increasingly seeing the Monetary Policy Committee cutting the repo rate by December, or a change in the policy stance to 'neutral' from 'withdrawal of accommodation' by October, dealers said. This has also led to spreads between the benchmark 5- and 10-year paper widening to 9 basis points, the highest since early February.

Meanwhile, the 10-year benchmark, 7.10%, 2034 bond saw some selling pressure from traders who had bought the bond before the Budget in anticipation of a deep cut in the government's market borrowing, dealers said.

On the data front, there is a slew of data due in the world's largest economy. These data points are crucial ahead of the Federal Open Market Committee meeting scheduled at the end of the month, as it may lend cues on the rate actions, dealers said. US GDP growth for Apr-Jun was 2.8% on-year, against the estimates of 2.1%, data released after market hours showed. Currently, the market expects the US rate-setting panel to maintain the status quo in the upcoming meeting, while it sees the panel slashing rates by 25 bps in its September policy review. The interest rate stands at 5.25-5.50% at present.

"The market has already factored in that rate cut in the US. I don't think we will cut in October, but the pressure to maintain the interest rate differential will be there, so expect a cut by December," a dealer at a state-owned bank said. "But if the RBI is somehow able to handle currency, then given our growth and inflation, there is no actual urgency to cut."

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 761.65 bln rupees, higher than 635.85 bln rupees on Wednesday. There were no trades carried out using the wholesale digital rupee pilot today, same as the previous day.

OUTLOOK

On Friday, government bond prices are seen opening steady as traders may avoid aggressive bets on caution ahead of the 350-bln-rupee gilt auction, dealers said. At the auction, the government will sell 120 bln rupees of the 7.04%, 2029 bond, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.34%, 2064 bond.

Traders will now turn their focus to data from the US, dealers said. The personal income and outlays for June are due on Friday. According to Dow Jones, core personal consumption expenditure price index, which is the Fed's preferred gauge, is expected to rise 2.6% on year and 0.2% on-month.

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 6.93-7.00% during the day.

India Gilts: Remain up; market awaits crucial US economic data

MUMBAI--1527 IST--Prices of government bonds remained up today. However, traders were cautious in placing aggressive bets ahead of the key US economic data, due in the week, dealers said. 

Traders keenly await the US advance estimate for Apr-Jun GDP, scheduled at 1800 IST, and the US personal consumption expenditures data for June on Friday for fresh guidance to see if these two data points are able to affirm investors' expectations of a rate cut in the US by September, dealers said.

In the secondary market, longer-tenure government securities saw an increased demand from foreign investors, insurers, and pension funds, dealers said. The foreign inflows saw an uptick recently as, after the inclusion of government bonds into the JP Morgan's Government Bond Market-Emerging Index in June-end, the weightage of bonds will increase to 2% by the end of the month, thereby attracting foreign flows into government bonds, dealers said.

Traders see that the 10-year benchmark, 7.10%, 2034 bond, is likely to hold at the crucial level of 6.95% unless there is a major cue in the market which will push the yield on the 10-year benchmark to either side, dealers said.

"It is difficult to breach 6.95% levels, both parties are comfortable at this level," a dealer at a state-owned bank said. "The market has tested this level time and again, and failed to breach it sustainably. Something like a change in stance or cut in rates will lead to this level breaking."

In the secondary market, state-owned banks were selling government bonds in order to lighten their portfolios, while primary dealers were placing short bets on the 15-year, 7.37%, 2039 bond, capping the gains on the bond, dealers said. Private banks and foreign investors were seen on the buying side.

On the global front, the market is likely to track the movement in US Treasury yields after the US GDP and personal consumption expenditure data are out. During the day, the yield on the 10-year benchmark US Treasury note eased to 4.24% from the day's high of 4.28%. 

The personal consumption expenditure, the key inflation figure, is expected to rise 0.1% on a monthly basis, a Reuters poll showed.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 432.80 bln rupees, against 584.40 bln rupees at 1530 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.93-6.98%. (Anupreksha Jain)

India Gilts: Remain up; short-term bonds up on fall in US 2-yr yld

MUMBAI--1258 IST--Prices of government bonds remained up, tracking the overnight indexed swap market, dealers said. Demand for short-term bonds remained robust, tracking a fall in short-term US Treasury yields after strong demand for two-year notes at an auction, dealers said. Reduction in net short-term borrowings in the Budget also aided demand for short-term bonds.

Trade volumes of short-term bonds rose as traders expect a cut in the domestic policy rate by December, or a change in the policy stance of the Reserve Bank of India's Monetary Policy Committee to 'neutral' from 'withdrawal of accommodation' by October, dealers said. This comes against a backdrop of rising bets of a rate cut in the US, they added.  

"As and when rate cut expectations increase, flows start coming in short-term bonds, and this is what is happening right now," a dealer at a private bank said. "Also, the spread between the 10-year and short-term bonds has widened, and it will widen further." The current spread between the 5-year paper and the 10-year paper is around 8 basis points, the highest since early February.

Meanwhile, the 10-year benchmark, 7.10%, 2034 bond saw some selling pressure from traders who had bought the bond before the Budget in anticipation of a deep cut in the government's market borrowings, dealers said. In the secondary market, state-owned banks and primary dealers were seen on the selling side, while private banks and foreign investors were seen on the buying side, dealers said. Mutual funds were keen on buying short-term bonds. According to the data by Clearing Corp of India Ltd, mutual funds were net buyers on Wednesday. 

Market sentiment was positive owing to receiving momentum in overnight indexed swap rates, dealers said. The one-year swap opened at 6.66%, the lowest level since Feb 9, and the five-year swap contract touched 6.23% after opening at 6.25%. The robust receiving momentum in the contracts pushed up gilt prices, dealers said. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 432.80 bln rupees, against 285.70 bln rupees at 1230 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.93-6.98%. (Anupreksha Jain)

India Gilts: Up on rising bets of 2024 rate cuts in OIS

MUMBAI--0940 IST--Prices of government bonds rose as offshore traders received fixed rates in overnight indexed swap contracts, anticipating a rate cut in the US by September which may translate into a cut in the domestic policy rate by December, dealers said. 

The one-year swap opened at 6.66%, the lowest level since Feb 9, and the five-year swap contract touched 6.23% after opening at 6.25%. The robust receiving momentum in the contracts has pushed up gilt prices, dealers said. The odds of a 25-basis-point cut in the interest rate by September in the US have increased to 100% from 96% chance a day ago, according to the CME Fedwatch tool.

"Right now this uptick in gilt prices is solely because of receiving momentum in OIS," a dealer at a private bank said. "It is quite possible that traders are betting for rate cut in US by September as the chances have again risen to 100%."

The one-year swap rate factors in a 25-bps rate cut in February, dealers said. However, traders are increasingly taking bets that the Monetary Policy Committee could change its policy stance to 'neutral' from 'withdrawal of accommodation' by October and cut the policy repo rate, currently at 6.50%, by December.

Key US economic data this week threatens this view, and gains are likely to be capped before the data releases. The advance estimate for US GDP for Apr-Jun is scheduled to be released after market hours today, while personal income and outlays for June are due on Friday.

Longer-tenure government securities saw an increased demand from foreign investors, insurers, and pension funds as the yield curve steepened, dealers said. Foreign investors were buying the 7.18%, 2037 bond, as this security is classified under the fully accessible route. In addition to this, some traders covered their short bets placed on the 7.18%, 2037 bond. Moreover, as the issuance of infrastructure bonds by banks has slowed down, the impact of a rise in the 10-year US Treasury yield did not have an impact on bond prices, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 87.70 bln rupees, against 37.05 bln rupees at 0930 IST on Wednesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.01%. (Anupreksha Jain)

India Gilts: Seen tad down tracking overnight rise in US yields

MUMBAI – Prices of government bonds are seen opening a tad lower, tracking an overnight rise in US Treasury yields, dealers said. During the day, primary dealers are likely to continue trimming their bond holdings ahead of the 350-bln-rupee gilt auction, scheduled on Friday, they added.

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.94-7.01%, against 6.96% on Wednesday. At the auction, the government will sell three dated securities worth 350 bln rupees.

The yield on the 10-year benchmark US Treasury note rose to 4.27% against 4.24% at the time the Indian market closed on Wednesday. A rise in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors. US yields rose ahead of key economic data, due in the remainder of the week.

However, demand for short-term bonds is likely to remain robust throughout the day owing to a reduction in net short-term borrowings in the Budget, dealers said. In the Union Budget for 2024-25 (Apr-Mar), there was a reduction of 1 trln rupees in net short-term borrowings compared to the Interim Budget. The net short-term borrowing aim was lowered to (-)500 bln rupees from 500 bln rupees in the Interim Budget.

"Along with a cut in short-term borrowings, the shorter-end will outperform today as well as the 2-year US Treasury yield is lower than our market close," a dealer at a private bank said. The two-year US yield fell 3 basis points to 4.37% at settlement on Wednesday after a strong auction for the two-year notes.

In the secondary market, state-owned banks may sell gilts in small quantities in order to lighten their portfolios, dealers said. Due to weakening in the rupee, foreign banks may continue to sell gilts. However, the selling momentum may not be enough to push prices downwards, dealers said.

On Wednesday, the rupee settled at a record closing low against the dollar as importers' dollar purchases weighed on the Indian unit. On Wednesday, the rupee settled at 83.7175 a dollar after hitting a fresh record low of 83.7200 a dollar.

As for key data points, the advance estimate for US Apr-Jun GDP is scheduled to be released after market hours today, while personal income and outlays for June are due on Friday. The market may also take cues from the comments of various US Federal Reserve officials, who are lined up to speak, as it lacks further domestic cues, dealers said.  (Anupreksha Jain)

End

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

Edited by Vandana Hingorani

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