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Informist, Monday, Jul 29, 2024

By Aaryan Khanna

NEW DELHI – Government bond prices ended higher today due to a fall in US Treasury yields after latest inflation data reinforced hopes of a rate cut by the US Federal Reserve in its policy meeting in September. The yield on the domestic 10-year benchmark bond fell to its lowest closing level in nearly 28 months.

The 10-year benchmark 7.10%, 2034 bond closed at 101.25 rupees, or 6.92% yield, against 101.09 rupees, or 6.94% yield on Friday. This is the lowest closing yield level for a 10-year benchmark bond since Apr 7, 2022.

"A trader doesn't need to pinpoint an exact reason, the odds are in your favour buying in along with the momentum," a dealer at a private bank said. "These are multi-year lows, so you know where to sell, but fundamentally it is difficult to construct an argument to hold prices down."

The yield on the 10-year benchmark US Treasury note fell to 4.16% at the end of Indian market hours today, against 4.24% on Friday. US Treasury yields fell after core personal consumption expenditure prices rose 2.6% on year in June, the same as the previous month and along expected lines. This is the US Federal Reserve's preferred inflation gauge. 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.

CME FedWatch Tool shows that Fed Fund Futures traders are certain that interest rates in the US would be cut by at least 25 basis points by September, with some betting on a rate cut even in July or a 50-bps interest rate cut in September. The US Federal Open Market Committee's next policy outcome is scheduled after Indian market hours on Wednesday, and it is likely to signal that it is ready to soften rates, dealers said.

Banks also continued to buy short-term bonds for their balance sheets after the Reserve Bank of India proposed new norms on Thursday that are expected to push up demand for dated securities by as much as 5 trln rupees, dealers said. The fact that banks continued to be aggressive, even after a surge in short-term bond prices on Friday, also propelled the market momentum, they said.

Investors have been driving bond yields lower, helped by the regulatory push and the expectation of softer monetary policy in India if the FOMC indicates it is ready to cut rates in September. Bonds maturing between 2026 and 2028 have been a favourite for asset-liability managers as they look ahead to the introduction of the new liquidity coverage ratio norms, dealers said. To meet the new norms, banks will have to substantially add to their holdings of government bonds.

The draft guidelines propose that banks should assign an additional 5% run-off factor on retail deposits opened by customers using internet and mobile banking facilities. The proposal also said that unsecured wholesale funding, which is provided by non-financial small business customers, will be treated as retail deposits. Both norms will drive banks' cost of business higher, and push up the need to mobilise deposits and assets such as gilts to match those liabilities, dealers said.

In such an environment, banks and money managers such as mutual funds want to invest in gilts across maturities. While short-term bonds are immediately in favour, some fund managers continue to favour long-term bonds, which generate higher capital gains, dealers said. With short-term bond prices having already risen sharply on Friday, some traders also chose to trim their holdings of bonds maturing under five years today and pick up bonds maturing between seven and 15 years, dealers said.

"The risks to not investing are only growing by the day," a dealer at a state-owned bank. "It is better to push cash into bonds for now, and even turn some leveraged positions into positive rather than negative."

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 879.50 bln rupees, lower than 966.20 bln rupees on Friday. There were four trades worth 200 mln rupees carried out using the wholesale digital rupee pilot today, against none in the previous session.

OUTLOOK

On Tuesday, government bond prices may open on a mixed note. Prices of bonds maturing in 14 and 30 years may open lower after the RBI said it would exclude future issuances of such securities under the Fully Accessible Route, which have no limits for investment by foreigner portfolio investors.

This may prove beneficial for currently issued bonds, and also for bonds maturing in under 14 years as these are likely to be the target of foreign portfolio investors. Meanwhile, monetary policy reviews in the US and Japan on Wednesday are closely awaited for fresh cues on the interest rate front, 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 6.88-6.96% during the day.

India Gilts: Remain up; gains capped as traders sell bonds at profit

MUMBAI--1524 IST--Prices of government bonds remained up today on the Reserve Bank of India's proposal to tweak liquidity coverage norms, dealers said. However, state-owned banks and primary dealers sold gilts at a profit, capping the gains.

"The market is confident that the draft may become the craft," a dealer at a private bank said. "The market is happy as US yields are down, liquidity in the banking system is also in a huge surplus."

Prices of bonds with maturity of less than five years were moving in a narrow range as traders sold these bonds at a profit, preventing the prices from inching higher, dealers said. On Friday, following the release of draft guidelines pertaining to the liquidity coverage ratio, short-term bonds outperformed long-term securities. However, the buying momentum in these papers has slowed down, they added.

Meanwhile, demand for gilts between 7-year and 10-year maturities was robust as these are the most liquid bonds as compared to others, dealers said. "The other part of the curve is not liquid, so traders are selling other bonds and buying the 10-year," the dealer said.

Dealers said if the draft guidelines get implemented, government bonds are likely to see an incremental demand of around 1-2 trln rupees on a net basis. This has led to a surge in the trading volume in the secondary market. Further, the liquidity surplus in the banking system was the highest since Apr 5, which helped gilt prices to move up further, dealers said.

On the global front, a fall in US Treasury yields also aided gilt prices, dealers said. The yield on the 10-year benchmark US Treasury note fell to 4.17% against 4.24% at the time the Indian market closed on Friday.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 756.95 bln rupees, against 776.11 bln rupees at 1530 IST on Friday. 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: Remain up; proposed LCR norms to increase demand for bonds

MUMBAI--1155 IST--Prices of government bonds remained up, tracking a fall in US Treasury yields, dealers said. The market sentiment also remained upbeat on notification of the draft guidelines regarding Basel III liquidity coverage ratio norms, they added.

The draft guidelines propose that banks should assign an additional 5% run-off factor on retail deposits opened by customers using internet and mobile banking facilities. These guidelines have spurred the demand for government bonds from banks as they will have to maintain large amounts of government bonds as a percentage of deposits, dealers said.

"The market is still reacting positively to the LCR draft guidelines, though in the short-term, some profit-booking is happening," a dealer at a private bank said. "I think today the 10-year (7.10%, 2034 bond) is rallying on the notification because it missed the rally earlier." During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond hit 6.92%, the lowest level since Apr 8, 2022.

Traders also bought government bonds ahead of the US Federal Open Market Committee's meeting, scheduled on Tuesday and Wednesday, dealers said. The US Federal Reserve is expected to keep the interest rate unchanged at 5.25-5.50%.

Dealers said that if the draft guidelines get implemented, government bonds are likely to see an incremental demand of around 1-2 trln rupees on a net basis. Meanwhile, some others said the impact of the guidelines is likely to be gradual and gilts may not see a sudden spike in demand, as the implementation will come into force only from Apr 1.

In the secondary market, private banks and foreign banks were seen on the buying side, while some state-owned banks sold gilts at a profit, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 527.70 bln rupees, against 518.55 bln rupees at 1130 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.01%. (Anupreksha Jain)

MUMBAI--0937 IST--Prices of government bonds rose as US Treasury yields fell after the US personal consumption expenditure price index for June firmed up the rate cut bets in the US by September, dealers said. Meanwhile, state-owned banks sold gilts at a profit, capping the gains. 

In the secondary market, private banks and foreign investors were on the buying side, while foreign banks sold gilts in small quantities owing to the weakening in the rupee, dealers said. "Till the FOMC (Federal Reserve Open Market Committee) the market will move in a narrow range of 1-2 paisa here and there," a dealer said. "Something big has to happen in order to break 6.90% (on 7.105, 2034 bond) level sustainably as there is no fundamental cue (on domestic front) in the market."

The demand for short-term bonds was also seen as robust in the secondary market. The combination of increased rate cut bets both in the US and in India, reduction in the government's net short-term borrowings in the Union Budget, and the latest draft guidelines on the Basel III framework on liquidity coverage ratio, has paved the way for robust demand for short-term bonds, dealers said.

On Thursday, the Reserve Bank of India released the draft guidelines regarding the liquidity coverage ratio. The draft guidelines propose that banks should assign an additional 5% run-off factor on retail deposits opened by customers using internet and mobile banking facilities. These guidelines have spurred the demand for short-term bonds from banks, dealers said.

Moreover, after the personal consumption data was out on Friday, the hopes of a rate cut in the US by September were affirmed, translating into a possible rate cut in domestic policy by December. This has aided the demand for short-term bonds as, when rates ease, traders and investors usually prefer to buy short-term bonds. CME FedWatch Tool showed that Fed Fund Futures had full certainty that interest rates in the US would be cut by September. The Federal Funds rate is currently at 5.25-5.50%. 

The yield on the 10-year benchmark US Treasury note fell to 4.18% against 4.24% at the time the Indian market closed on Friday after the personal consumption expenditure price index came largely along the expected lines, dealers said.

The personal consumption expenditures price index rose 0.1% last month after being unchanged in May. The increase in PCE inflation was in line with economists' expectations. Traders looked forward to the US Federal Open Market Committee policy meeting, scheduled on Tuesday and Wednesday.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 181.00 bln rupees, against 124.45 bln rupees at 0930 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.01%. (Anupreksha Jain)

India Gilts: Seen higher tracking fall in US Treasury yields

MUMBAI – Prices of government bonds are seen opening higher tracking a fall in US Treasury yields, dealers said. However, gains may be capped as the data from the Reserve Bank of India, released on Friday, showed that the central bank sold 27.15-bln-rupee gilts through open market operations in the week ended Jul 19.

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.91-6.96%, against 6.94% on Friday. During the day, foreign banks may continue to sell gilts owing to the weakening of the rupee, dealers said. On Friday, the Indian currency settled at 83.7275 a dollar. Foreign banks were the net sellers on Friday, according to the data from Clearing Corp of India Ltd. 

In the secondary market, demand for short-term bonds is seen robust as increased bets of a rate cut in the US by September may translate into a rate cut in domestic policy by December, dealers said.

The yield on the 10-year benchmark US Treasury note fell to 4.18% in Asian trade against 4.24% at the time the Indian market closed on Friday. 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 US Treasury yields fell after the personal consumption expenditure price index for June came along the expected line, firming up bets of a rate cut in the US by September, dealers said. CME FedWatch Tool showed that Fed Fund Futures had full certainty that interest rates in the US would be cut by September. The Federal Funds rate is currently at 5.25-5.50%. 

The personal consumption expenditures price index rose 0.1% last month after being unchanged in May, the Commerce Department's Bureau of Economic Analysis reported on Friday. The increase in PCE inflation was in line with economists' expectations. In the 12 months through June, personal consumption expenditures inflation advanced 2.5%, a tad lower than 2.6% in May. Core inflation saw a 2.6% rise on an annualised basis, similar to the previous month.

Traders now look forward to the US Federal Open Market Committee policy review and Bank of Japan's policy outcome. Both the central banks' meeting outcomes are due early Thursday and Wednesday, respectively. Rates are largely expected to be held steady in the US. However, the Bank of Japan is expected to raise interest rates. The key interest rate in Japan is currently at 0.0-0.1%.  (Anupreksha Jain)

End

US$1 = 83.73 rupees

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

Edited by Ashish Shirke

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