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Informist, Tuesday, Jul 30, 2024

By Aaryan Khanna

NEW DELHI – Government bond prices ended lower today, though the reaction in short- and long-term bonds varied. Bonds maturing in 15 years and above slumped due to large sales by foreign investors after the Reserve Bank of India limited inflows into newer long-duration bonds, dealers said.

The 10-year benchmark 7.10%, 2034 bond closed at 101.15 rupees, or 6.93% yield, against 101.25 rupees, or 6.92% yield on Monday. Monday's closing yield level was the lowest for a 10-year benchmark bond since Apr 7, 2022.

On Monday, the Reserve Bank of India notified that future issuances of the 14-year and 30-year papers will be excluded from the fully accessible route, which has no limit on foreign investments. Foreign portfolio investors will now have to adhere to general limits for the new bonds, which would be 6% of the bond's outstanding. They could also invest in such bonds through the voluntary retention route, the RBI notification said.

The move was likely aimed at protecting the returns for domestic long-term investors such as life insurers and pension funds, bond dealers said. Bond yields have fallen sharply in 2024, with the 30-year yield down 37 basis points this year to 7.04% on Monday. There was potential for increasing competition and demand in that segment from foreign investors tracking the bond indices, which will be skewed to heavily issued long-duration papers, dealers said.

The decision is likely to add to volatility in the government bond market as FPI purchases will be concentrated in a lower number of securities, dealers said. Meanwhile, lower FPI demand for bonds maturing above 10 years would also translate to a steeper yield curve, with yields on long-term bonds rising and those of shorter tenures falling. 

Traders were hoping the government would include more bonds into the fully accessible route, particularly the currently excluded 15- and 40-year benchmark bonds. With the notification, such hopes – particularly for long-term bonds – were dashed and led to foreign portfolio investors trimming their holdings of the gilts, dealers said. 

Losses were initially less 14-year and 30-year bonds that are already in the fully accessible route and are expected to draw increased FPI attention. Yields on the 15-, 40- and 50-year bonds, which are not in the fully accessible route, all rose about 3 basis points today, the highest increase across tenures. By the end of the day, the yield on even the 30-year benchmark, 7.30%, 2053 bonds rose to a similar degree.

However, foreign funds are unlikely to flow to such tenures over the medium term, and supply-demand dynamics are much more favourable in bonds maturing under 10 years, dealers said. Domestic traders also sold short-term gilts to foreign banks looking to trim their holdings of long-duration bonds.

"Don't be surprised to see a big hit from FPIs today," a dealer at a primary dealership said. "They will all have tried to take out cash from the market today, trying to figure out what signals the RBI want to send by this. Traders also thought to do a round of profit booking because of this."

Late on Monday, the government said it would sell 220 bln rupees through three gilts on Friday, including a new 30-year bond that will mature in 2054. The new bond is likely to command a discount of 2-5 basis points at the auction compared with the current 30-year benchmark 7.30%, 2053 gilt, dealers said. The 2053 bond's price will likely continue to slide heading into the auction, though domestic investors may find the 7.10% yield level attractive to buy the gilt, they said.  

Yields of bonds maturing in less than 10 years also rose about 1-2 bps, largely insulated from the fallout in longer-term gilts. Future inflows from foreign portfolio investors are likely to be concentrated in the 5-year, 7-year, and 10-year benchmark government bonds, which are the only tenures now eligible under the fully accessible route, dealers said. These bonds were already in favour after the RBI's proposed norms on banks' liquidity coverage ratio last week, which has driven banks to expand their bond portfolios.

The draft guidelines proposed that banks should assign an additional 5% run-off factor on retail deposits opened by customers using internet and mobile banking facilities. It also proposed 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. The demand for dated securities may rise by 4-5 trln rupees on this account, even before the proposed norms come into effect on Apr 1.

"Structurally, the demand is still there in the short-end. This is a straightforward steepening environment, and short-term bonds will be in demand very strongly over the next 9-12 months," a dealer at a foreign bank said.

Meanwhile, traders were cautious ahead of the US Federal Open Market Committee meeting outcome after Indian market hours on Wednesday, dealers said. The US Federal Reserve is expected to keep the interest rate unchanged at 5.25-5.50%. Traders hope the US rate-setting panel will give a signal to cut rates by September, and this may translate into a possible rate cut in India by December. The market is likely to assess the movement in 10-year US yields after the outcome of the US Fed's policy meeting, dealers said.

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 750.35 bln rupees, lower than 879.50 bln rupees on Monday. There were no trades carried out using the wholesale digital rupee pilot today, against four trades worth 200 mln rupees in the previous session.

OUTLOOK

On Wednesday, government bond prices may open steady on caution ahead of the US FOMC outcome at 2330 IST, dealers said. The committee is likely to keep policy rates unchanged but may make note of falling inflation and employment in recent months. This could set the stage for a rate cut in the US at the next policy meeting in September, dealers said.

Traders may also avoid large bets after recent volatility caused by the RBI circular on FPI investment in long-term bonds and the draft norms on liquidity coverage ratio. Short-term bonds remain in favour, while long-term bond prices are expected to continue falling, dealers said.

Meanwhile, the monetary policy review by the Bank of Japan early on Wednesday may also provide a fresh cue on the interest rate front, dealers said. The central bank is likely to raise its policy rate by 10 bps to 0.1%, according to a Reuters poll.

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 down; sales more widespread as traders book profit

MUMBAI--1545 IST--Prices of government bonds remained down as foreign banks continued to trim their bond holdings following the Reserve Bank of India's notification that the future issuances of the 14-year and 30-year papers will be excluded from the fully accessible route, dealers said.

In view of the notification, the inflows are likely to be concentrated in the five-year, seven-year, and 10-year government bonds, dealers said. "The market is down because of RBI's circular, it has just punctured the upbeat sentiment after LCR (Liquidity Coverage Ratio) draft guidelines," a dealer at a primary dealership said. "Also, there is good amount of paying in OIS (overnight indexed swaps) as the market had rallied a lot in the past days."

Paying momentum in the overnight indexed swap market also weighed on gilts, dealers said. Dealers said there is no fundamental reason behind the paying momentum. The market is going through a reverse trend as for the last few days, swaps saw robust receiving across the contracts.

On the global front, the only comfort for the market is that the yield on the benchmark 10-year US Treasury note was little changed from the time the Indian market closed on Monday. The market is likely to assess the movement in the 10-year US yield after the outcome of the US Fed's policy meeting, dealers said.

In the secondary market, foreign banks were seen leading the selling spree, followed by domestic players, dealers said. Meanwhile, traders were cautious ahead of the US Federal Open Market Committee meeting, starting today, dealers said. The US Federal Reserve is expected to keep the interest rate unchanged at 5.25-5.50%.

The US rate-setting panel is likely to give a signal to cut rates by September, and this may translate into a possible rate cut in the domestic policy, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 618.10 bln rupees, against 751.95 bln rupees at 1530 IST on Monday. For the rest of the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.90-6.95%. (Anupreksha Jain and Aaryan Khanna)

India Gilts: Down; benchmark 15-year, 40-year bonds slump as foreign banks sell

MUMBAI--1156 IST--Prices of government bonds were down as traders sold gilts at a profit, dealers said. Meanwhile, 7.23%, 2039 bond and 7.34%, 2064 bond were sharply down as foreign investors diverted their investments to other government bonds of similar maturities under the fully accessible route, dealers said. 

This came after the Reserve Bank of India notified that the future issuances of the 14-year and 30-year paper will be excluded from the fully accessible route, which has no limit on foreign investments. Dealers said foreign investors who bought bonds had hoped that the central bank would do away with the distinction of fully accessible route government bonds and otherwise. With the new notification in place, these investors have done away with the hope that most government bonds would be part of the category, they added. This led to outflow from these bonds.

Currently, the 15-year bond and the 40-year bonds are not part of the fully accessible route. 

"Some specific papers were down as the circular dented hopes that 15-year and 40-year will be part of FAR (fully accessible route) securities," a dealer at a primary dealership said. "The rest of the market is just 2-3 paisa down, nothing much."

Dealers said that foreign investors are likely to concentrate their flows between 7- and 10-year papers as this segment is considered the most lucrative and liquid. Given the latest notification by the central bank, foreign investors are likely to be more cautious while investing in the longer bonds, dealers said. Moreover, they would want the yield spread between benchmark 10- and 15-year bonds to widen, as the 15-year is unlikely to be a part of the fully accessible route, they added. Currently, the yield spread between the bonds is 7 basis points.

In the secondary market, state-owned banks, foreign banks, and primary dealers were on the selling side, while some private banks and mutual funds were on the buying side.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 333.50 bln rupees, against 492.80 bln rupees at 1130 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-6.94%. (Anupreksha Jain)

India Gilts: Most in thin bad; FPI demand pushes up 7.18%, 2037 bonds

MUMBAI--0942 IST--Prices of most government bonds were in a thin band as traders refrained from placing aggressive bets ahead of the US Federal Open Market Committee meeting, starting today, dealers said. Meanwhile, demand from foreign investors drew the 7.18%, 2037 bond prices upwards.

State-owned banks continued to sell gilts at a profit, thereby limiting gains, dealers said. According to the Clearing Corp of India Ltd data, state-owned banks were the net sellers on Monday. In the secondary market, traders bought gilts on expectation of a softer monetary policy in India if the US Federal Open Market Committee indicates it was ready to cut rates in September, dealers said. The two-day meeting of the US rate-setting panel starts today.

Meanwhile, private banks were continuing with their buying spree. However, the buying momentum was not enough to drive prices further upwards, dealers said. Private banks were the top net buyers on Monday, as per data from the Clearing Corp of India Ltd. Mutual funds were seen on the buying side as they prefer longer-term bonds, which generate higher capital gains, dealers said.

At the same time, the 7.18%, 2037 bond and 7.30%, 2053 bond rose on firm demand from foreign investors. This comes after the notification by the Reserve Bank of India said that it would exclude future issuances of bonds with maturity of 14-years and 30-years under the Fully Accessible Route, which has no limits for investment by foreign portfolio investors, dealers said. As foreign investors are confident about Indian bonds in comparison with other emerging markets' government bonds, therefore, they are likely to buy these bonds, irrespective of any notice from the central bank, they added.

"I do not think there was any reaction (negative) to the notice, both the papers are up. If a foreign investor wants to buy, he will buy," a dealer at a private bank said. "...the 2053 bond was the first one to get traded today." This comes following the inclusion of government bonds into the JP Morgan's Government Bond Market-Emerging Index last month, and as their weightage was rebalanced on Friday.

Traders now await the US Federal Open Market Committee's next policy meet outcome, which is scheduled after Indian market hours on Wednesday, and is likely to signal that it is ready to soften rates, dealers said. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 161.75 bln rupees, against 136.50 bln rupees at 0930 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-6.94%. (Anupreksha Jain)

India Gilts: Seen steady as traders await US FOMC July meet outcome

MUMBAI – Government bonds are seen opening steady as traders may refrain from placing aggressive bets ahead of the US Federal Open Market Committee meeting, starting today, dealers said. Additionally, an overnight rise in US Treasury yields may weigh on gilt prices.

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.90-6.95%, against 6.92% on Monday.

Bonds with maturity of 14-years and 30-years are seen opening lower after the Reserve Bank of India on Monday said it would exclude future issuances of such securities under the Fully Accessible Route, which has no limits for investment by foreign portfolio investors. "This will definitely have a knee-jerk reaction, but will it sustain? I do not think so," a dealer at a private bank said. 

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, dealers said.

Demand for short-term bonds continues to be seen as robust in the secondary market as banks may continue the buying momentum in short-term bonds for their balance sheets after the RBI proposed new norms on Thursday that are expected to push up demand for dated securities by around 3-5 trln rupees, dealers said.

Furthermore, an increased chance of rate cuts in both the US and India, may add to the upbeat sentiment, dealers said. The 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.

The yield on the 10-year benchmark US Treasury note rose to 4.18% against 4.16% at the time the Indian market closed on Monday. 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.

Traders are now keenly awaiting the US Federal Open Market Committee's next policy outcome, which is scheduled after Indian market hours on Wednesday, and it is likely to signal that it is ready to soften rates, dealers said.  (Anupreksha Jain)

End

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

Edited by Saji George Titus

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