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Informist, Thursday, Aug 1, 2024

By Aaryan Khanna

NEW DELHI – Government bond prices ended off highs as traders took profits after early trades pushed the 10-year benchmark gilt yield to a fresh multi-year low, dealers said. Bond prices held on to gains on signs of easing monetary policy in the US, after the outcome of the US Federal Open Market Committee late on Wednesday.

The 10-year benchmark 7.10%, 2034 bond closed at 101.27 rupees, or 6.92% yield, against 101.20 rupees, or 6.93% yield on Wednesday. At 6.91% earlier in the day, the 10-year gilt yield hit a fresh 28-month low, continuing a pattern from earlier this week.

Traders from foreign banks were especially keen to pick up India's government bonds, expecting additional capital allocation from offshore parents in the coming months, dealers said. The greater risk appetite is likely to drive bond prices lower, with US Treasury yields expected to fall further after slumping on Wednesday. Moreover, with US policymakers signalling their comfort with thinking about a rate cut, some domestic traders were also optimistic of rate cuts in India by December.

"US data has been softening throughout July, which has helped push down US yields also," a dealer at a foreign bank said. "This is a culmination of that thinking, that ultimately we are now looking at a softer monetary policy setting throughout the globe, hopefully."

The US rate-setting panel adopted a softer tone in its policy statement, noting some further progress on inflation falling to its 2% target. In addition, it also cited risks to both sides of its dual mandate on inflation and maximum employment. This is a departure from earlier statements, when it only cited risks to inflation. In June, US personal consumption expenditure index, the Fed's preferred inflation gauge, rose 2.5% on year and 0.1% on month.

Comments from US Federal Reserve Chair Jerome Powell further boosted hopes of a cut in interest rates in the US by September. Powell noted there was a discussion of cutting rates at this policy meeting, but eventually the committee decided it needed more confidence on inflation falling to its 2% target. Even before Wednesday's rate decision, Fed funds futures traders had fully priced in the FOMC cutting rates by September, according to the CME FedWatch tool.

The yield on the 10-year benchmark US Treasury note fell to 4.06% at the close of Indian market hours, against 4.14% on Wednesday. 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.

Some traders piled on to gilts, expecting signs of a rate cut by the Monetary Policy Committee as early as December, while also looking to more immediate triggers, such as a softening of the policy stance to "neutral" at the August monetary policy outcome on Aug 8. Others were less convinced the panel would soften its stance, with Reserve Bank of India Governor Shaktikanta Das--who chairs the six-member committee--repeatedly saying in July that it was too early to consider changing policy rates and stance.

This led to profit-booking, which started early after prices surged to the day's high. State-owned banks likely trimmed their holdings of bonds maturing in 10 years and above, dealers said. Traders from private banks, who had bought gilts anticipating a softer tone from the FOMC, may also have sold bonds in the secondary market. Foreign banks were likely buyers today, with the 10-year US Treasury yield at the lowest level since early March, dealers said. Mutual funds were also likely buyers, while primary dealerships may have covered short bets, dealers said.

"The action happened in the first half, when everyone was adjusting positions based on the FOMC," a dealer at primary dealership said. "After that, the market volumes slightly sobered down." 

The relatively small size of the weekly bond auction would mitigate the usual short sales by primary dealerships before the auction, as this section of the market had to pick up bonds at the debt sale, dealers said. The government will sell 60 bln rupees of the 7.02%, 2027 bond, 60 bln rupees of the new 2034 green bond, and 100 bln rupees of the new 2054 bond through auction at 1030-1130 IST on Friday.

Moreover, some traders said that the auction of the green bond may not go through as domestic investors may not pay a 'greenium', or a green premium from investors, due to the bond's impact on sustainability, for the 10-year green bond. The RBI rejected all bids for the sovereign green bond at the auction on May 31, a first in 20 months, after poor bidding at the auction.

The government cut its gross borrowing aim to 14.01 trln rupees in the Union Budget for 2024-25 (Apr-Mar), from 14.13 trln rupees in the Interim Budget. This would correspond to not raising the 120 bln rupees of green bonds scheduled in Apr-Sep.

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 631.85 bln rupees, lower than 713.95 bln rupees on Wednesday. There were two trades worth 100 mln rupees carried out using the wholesale digital rupee pilot today, against four trades worth 200 mln rupees in the previous session.

OUTLOOK

On Friday, government bond prices may open steady ahead of the 220-bln-rupee weekly gilt auction, dealers said. Demand for long-term bonds will be closely gauged at the auction, after the RBI said the new 2054 bond will not be eligible under the fully accessible route.

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. 

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: In thin band after early gains on softer US FOMC remarks

NEW DELHI--1555 IST--Government bond prices were in a thin band after early gains. The 10-year gilt yield, which hit a fresh 28-month low earlier, needed another push to fall below the crucial 6.90% yield mark, dealers said.

Bonds held on to gains after the US Federal Open Market Committee's statement on its rate decision showed growing concern on jobs. This, in turn, cemented bets the US Federal Reserve's rate-setting panel would cut rates starting September, as was already expected heading into the policy outcome. The positive impact of the easier US rate view had been factored into bond prices, dealers said. However, the impact of the US rate decision – the panel held rates stable – on India's monetary policy was hotly debated.

Some traders piled on to gilts, expecting signs of a rate cut by the Monetary Policy Committee as early as December, while also looking to more immediate triggers, like a softening of the policy stance to "neutral" at the August monetary policy outcome on Aug 8. Others were less convinced the panel would soften its stance, with Reserve Bank of India Governor Shaktikanta Das--who chairs the six-member committee--repeatedly saying in July that it was too early to consider changing policy rates and stance.

"The market is looking for another trigger to breach these levels, which are already quite good to lighten up before auction tomorrow (Friday) and policy next week," a dealer at a private bank said. "Our sense is that 6.90% should hold, and traders turn a little bit defensive heading into domestic policy." 

Foreign banks were likely buyers today, with the 10-year US Treasury yield at the lowest level since early March, dealers said. The 10-year US yields have fallen by 9 basis points overnight to 4.06% after the US rate decision. Bond sales, likely by state-owned banks and primary dealerships, had broken the early momentum in the market.

These participants were also making room for the 220-bln-rupee bond auction on Friday. The relatively small size of the auction would mitigate the usual short sales by primary dealerships before the auction, as this section of the market had to pick up bonds at the debt sale, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 502.60 bln rupees, against 543.75 bln rupees at 1530 IST on Wednesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-6.94%. (Aaryan Khanna)

India Gilts: Erase some gains; yld on benchmark 10-yr bond at 2-yr low

MUMBAI--1200 IST--Government bonds erased some gains and were off the day's high as traders sold their bond holdings at a profit, dealers said. Despite this, an overall positive sentiment led to the benchmark 10-year yield hovering around a two-year low.

In the first half of July, traders had loaded books, while investors' appetite was also dull given the lack of firm cues and a flat yield curve, dealers said. This, however, changed towards the end of the month. With most data points and events out of the way, the market has better clarity on the gilt market outlook, they added.

"There is much euphoria in gilts right now. No negatives back home, nothing globally also," a dealer at a private bank said. "But it would suddenly not fall below 6.90% (on the benchmark 7.10%, 2034 bond) as it is a technical level. Also, current levels are good for booking profit."

The market now sees the yield curve steepening slightly further, dealers said. It expected the yield spread between the benchmark 10- and 15-year to be 12-15 basis points, they added. The yield spread between the two is currently at 9 bps. For short-term bonds, traders do not expect yields to fall sharply from here unless there is a change in either the domestic policy stance or the repo rate, dealers said.

Even with the Reserve Bank of India conducting open market operations sales for the last two weeks, the market seems rather confident that the central bank would only sell bonds in miniscule amounts, dealers said. This would not have a drastic impact on gilt prices, they added. In the fortnight ended Jul 19, the central bank net sold 61.2 bln rupees worth of gilts through OMOs.

Today, there were multiple factors that led to the upbeat sentiment in the market, including comments from US Federal Reserve Chair Jerome Powell on the global front. Domestically, positive cues started with a slight reduction in market borrowing, announced in the Union Budget 2024-25 (Apr-Mar). Meanwhile, for short-term bonds, the proposed guidelines for the Liquidity Coverage Ratio framework increased the demand, dealers said.

Powell indicated that the Fed may cut rates at its next meeting in September if inflation data showed cooling of the economy. This was after the Federal Open Market Committee kept the federal funds target rate unchanged at 5.25-5.50% for the eighth consecutive meeting. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 314.90 bln rupees, against 247.50 bln rupees at 1130 IST on Wednesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-6.94%. (Nishat Anjum)

India Gilts: Rise on fall in US ylds; PSU bks sell bonds, cap gains

MUMBAI--0940 IST--Prices of government bonds rose as US Treasury yields fell sharply after the US Federal Reserve's Chair Jerome Powell indicated that the Fed may cut rates at its next meeting in September if inflation data showed cooling of the economy. However, state-owned banks sold gilts at a profit, capping the gains on gilts.

In the secondary market, private banks continued with their buying spree, dealers said. In addition to private banks, foreign banks were also seen on the buying side. 

"It seems like the market will break the 6.90% level on the 10-year benchmark (7.10%, 2034 bond)," a dealer at a private bank said. "At the speech, Powell sounded extremely dovish as he nodded for a 50-basis-point cut in September as well. I think the market will rally a bit more during the day." The US Federal Open Market Committee had kept the federal funds target rate unchanged at 5.25-5.50% at its July meeting, as was widely expected.

Meanwhile, the state-owned banks are likely to keep selling their bonds at a profit if the yield on the benchmark 10-year paper remains below the key 6.93%, dealers said. The market now widely expects that the yield on the benchmark paper is unlikely to top 6.95% on a sustainable basis, dealers said. However, stronger buying momentum would be needed for it to go below the psychologically crucial level of 6.90%.

Trade volumes were robust in early trade, with traders as well as investors present in the secondary market, dealers said. According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 173.50 bln rupees, against 78.95 bln rupees at 0930 IST on Wednesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-6.94%. (Anupreksha Jain)

India Gilts: Seen higher tracking overnight fall in US yields

MUMBAI – Prices of government bonds are seen opening higher, tracking an overnight fall in US Treasury yields after the Federal Open Market Committee kept the interest rate unchanged, dealers said. Moreover, US Federal Reserve Chair Jerome Powell indicated high odds of a rate cut in September if inflation data shows a slowdown in the economy, dealers said. 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.90-6.95%, against 6.93% on Wednesday. Meanwhile, the yield on the 10-year benchmark US Treasury note fell to 4.05% against 4.14% at the time the Indian market closed on Wednesday. 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 Federal Open Market Committee kept the federal funds target rate unchanged at 5.25-5.50% at its July meeting, as was widely expected. This is the eighth consecutive meeting in which the US central bank has kept the policy rate unchanged. The policy decision was unanimous, with all 12 voting members voting to keep the Fed funds target rate unchanged. 

The decision was widely expected by the market. However, the only surprising factor was the change to a softer monetary policy outlook, dealers said. The panel said that in recent months, there has been some further progress towards the committee's 2% inflation aim. In June, the US personal consumption expenditure index, the Fed's preferred inflation gauge, rose 2.5% on-year and 0.1% on-month.

At the same time, the rate-setting panel said it does not see it appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.

Comments from Powell further boosted hopes of a cut in interest rates in the US by September, dealers said. Even before Wednesday's rate decision, investors had started seeing the Fed cutting rates in September, with the CME FedWatch tool showing Fed funds futures traders seeing a 100% chance of a rate cut at its next meeting.

A possible rate cut in the US by September may translate into a rate cut by the Reserve Bank of India's Monetary Policy Committee in December, dealers said. "He (Powell) was dovish. Now, we have to see our governor's (Shaktikanta Das) tone in the next policy meeting," a dealer at a private bank said. "India may have a shallow rate cut cycle... The US could have multiple cuts. The maximum cut in India can be two, whereas (there can be) 8-10 cuts in the US." (Anupreksha Jain)

End

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

Edited by Manisha Baxla

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