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Informist, Friday, Aug 2, 2024

By Aaryan Khanna

NEW DELHI – Government bond yields fell for the third straight day, putting the 10-year benchmark gilt yield at its lowest closing level since Mar 31, 2022. The fall was propelled by the 10-year US Treasury yield falling below the key 4% mark for the first time in six months.

The 10-year benchmark 7.10%, 2034 bond closed at 101.42 rupees, or 6.89% yield, against 101.27 rupees, or 6.92% yield on Thursday. Bond yields have fallen only 5 basis points this week, but have consistently fallen to fresh 28-month lows.

The benchmark yield faced strong resistance at 6.90%, running up against profit booking throughout the week. State-owned banks have been the most aggressive sellers, liquidating stock they had picked. The buying momentum eventually broke the crucial 6.90% mark towards the end of the day, particularly with foreign banks piling into Indian bonds as spreads between the 10-year US and India benchmark rose to a six-month high, dealers said.

"The US yield has been a really good factor to push up prices, and even helped up book some profit," a dealer at a state-owned bank said. "There has been a strong selling pressure now at 6.90%, after which the market will readjust and see where the next level is because it is entirely new territory."

The yield on the 10-year benchmark US Treasury note fell to 3.95% at the end of Indian market hours today, from 4.05% on Thursday. 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. US yields fell after soft economic data on Thursday, and following remarks from US Federal Reserve Chair Jerome Powell signalling that a rate cut in September was on the table.  

The Institute for Supply Management's manufacturing purchasing managers index for the US fell to 46.8 last month from 48.5 in June. Moreover, weekly unemployment claims in the US rose to a near 12-month high. Initial claims for state unemployment rose 14,000 to a seasonally adjusted figure of 249,000 in the week ended Saturday. It was more than the forecast of 236,000 claims in a Reuters poll of economists.

According to the CME FedWatch tool, Fed funds futures traders have fully priced in slightly more than a 50-bps rate cut in the US this year. In a note on Thursday, strategists from Goldman Sachs forecast a 75-bps rate cut in the world's largest economy in 2024, corresponding to the three remaining monetary policy reviews.

Despite the conviction about an upcoming US rate cut, domestic data had not shown signs of fracture and the Reserve Bank of India is not likely to soften its tone on monetary policy at the upcoming Monetary Policy Committee meeting, dealers said. The six-member panel is scheduled to meet Tue-Thu, and is widely expected to maintain the policy repo rate at 6.50% and the stance at "withdrawal of accommodation".

At the weekly gilt auction, the government sold 60 bln rupees of the 7.02%, 2027 bond, 16.97 bln rupees of a new 2034 green bond, and 100 bln rupees of the 7.09%, 2054 bond. The RBI partially accepted bids placed on the new 2034 green bond--out of 60 bln rupees, the RBI took only 16.97 bln rupees, and set the coupon at 6.90%. Dealers said only state-owned banks bid for the bond.

The market had speculated that the central bank might not accept any bids for the green bond if bids weren't at a "greenium" of at least 1 basis point, dealers said. Greenium refers to the premium investors are prepared to pay for green bonds due to its impact on sustainability. The coupon was set slightly lower than the prevailing yield on the 10-year benchmark 7.10%, 2034 bond at the time of the auction.

The auction was an afterthought today, and lent limited cues to the market. Traders also said the lack of reaction to the auction was because there were no trading papers – banks bought the three-year gilt for their balance sheets, while the 30-year bond was picked up by long-term investors like pension funds and life insurers.

"Typically, the auction gives at least some direction, but today the market has not moved at all," a dealer at a private bank said. "People are waiting for (US) non-farm payrolls, which I'm sure will give a direction to the market on Monday."

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 709.10 bln rupees, higher than 631.85 bln rupees on Thursday. There were no trades carried out using the wholesale digital rupee pilot today, against two trades worth 100 mln rupees in the previous session.

OUTLOOK

Gilts are not traded on Saturday. On Monday, bond prices are likely to shoot up after US Treasury yields slumped, following non-farm payrolls that were much softer than expected, dealers said.

The US added 114,000 jobs in July, against a consensus estimate of 175,000 jobs in a poll according to Reuters. The unemployment rate rose to 4.3% in July from 4.1% in June. The poor data has pulled down the US 10-year benchmark Treasury yields more than 10 bps to 3.83% as at 1830 IST.

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; weekly bond auction fails to lend fresh cues

MUMBAI--1457 IST--Prices of government bonds remained up as the yield on the 10-year benchmark US Treasury note remained below the crucial mark of 4.00%, dealers said. Since cut-offs at today's auction were largely along expected lines, it failed to provide fresh cues to the market.

At the auction, the government sold 60 bln rupees worth of the 7.02%, 2027 bond, 16.97 bln rupees of a new 2034 green bond, and 100 bln rupees worth of the 7.09%, 2054 bond. The Reserve Bank of India partially accepted bids placed on the new 2034 green bond – out of 60 bln rupees, the RBI took only 16.97 bln rupees, and set the coupon at 6.90%. Dealers said only state-owned banks bid for the bond.

"Cut-offs are largely along the expected lines, even the green bond came at decent levels," a dealer at a private bank said. "It is very unlikely for the private banks to bid for green bonds, I think only PSUs (state-owned banks) were there."

The market had feared that the central bank might not accept any bids for the green bond if bids weren't at a 'greenium' of at least 1 basis point, dealers said. Greenium refers to the premium investors are prepared to pay for green bonds due to its impact on sustainability.

State-owned and private banks bid aggressively for the 7.02%, 2027 bond for their asset-liability management needs, dealers said. Owing to the small issuance size, other investors also piled on the 2027 bond. Only 30 bids were accepted out of 150 bids at the auction, dealers said. The RBI set a cut-off price of 100.52 rupees or 6.81% yield on the bond.

Dealers said at the auction, the 30-year paper saw participation only from the usual players – insurers and pension funds. Since issuances of the new 30-year paper are not included in fully accessible route government securities, traders who are otherwise active in this segment were also seen missing, dealers said. While looking at the bid-coverage ratio, some said a few investors also bid aggressively, dealers said. A total of 130 of the 240 bids were accepted at the auction today, they added. The RBI set a coupon of 7.09% on the new 2054 bond.

In the secondary market, traders who had bought gilts at the 6.95% level on the 10-year benchmark were seen selling at a profit. Meanwhile, private banks, foreign banks, and foreign investors were seen on the buying side, dealers said.

On the global front, the yield on the 10-year benchmark US Treasury note fell to 3.95% from 4.05% at the time the Indian market closed on Thursday. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 239.60 bln rupees, against 260.20 bln rupees at 1130 IST on Thursday. 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: Up; mkt says RBI may reject bids for 10-yr green bond

MUMBAI--1140 IST--Prices of government bonds remained up, tracking an overnight fall in US Treasury yields, dealers said. Investors' demand for the 2027 paper at the 220-bln-rupee gilt auction was seen as robust, but a large section of the market expects that the Reserve Bank of India may not accept bids for the green bond.

At the auction, the government offered 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.

The market feels the Reserve Bank of India may reject bids at the green bond auction today if bids aren't at a 'greenium' of at least 1 basis point, dealers said. Greenium refers to the premium investors are prepared to pay for green bonds due to its impact on sustainability.

Meanwhile, private banks, state-owned banks, and foreign investors were likely to bid aggressively for the short-term bond owing to the small issuance size, dealers said. After the Reserve Bank of India's proposal to tweak the Basel-III norms pertaining to liquidity coverage ratio, demand for the short-term bond was seen as robust at the auction, they added. The draft guidelines have spurred demand for short-term bonds from banks, as they will have to maintain large amounts of government bonds as a percentage of deposits.

State-owned and private banks may buy short-term bonds for their asset-liability management needs, dealers said. "Demand will be there in the short-term bond," a dealer at a state-owned bank said. "But the other two papers may see some tail. These are mostly investors' preferred paper, so traders will be missing from the auction."

The market was divided on demand for the long-term bond. Some saw robust demand from insurers and pension funds, while others said that since new issuances of the 30-year paper are not included in fully accessible route government securities, foreign investors are likely to miss the auction. But the usual participation from insurers and pension funds was seen in the auction, dealers said. Since the notification, traders who were active in this segment were also seen missing, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 239.60 bln rupees, against 260.20 bln rupees at 1130 IST on Thursday. 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: Up as US 10-yr yld falls below 4%; mkt awaits debt sale

MUMBAI--0938 IST--Prices of government bonds rose as the yield on the benchmark 10-year US Treasury note fell below the key 4% mark, dealers said. However, traders refrained from placing aggressive bets ahead of a 220-bln-rupee gilt auction at 1030-1130 IST.

"6.90% (on 7.10%, 2034) looks like a good resistance level. Only if there is some push from foreign investors can we see below 6.90% levels on the 10-year paper," a dealer at a state-owned bank said. "Otherwise, it will hold at these levels and may rebound slightly, but the market will maintain its downward (yield) trajectory."

In the secondary market, traders who had bought gilts at the 6.95% level on the 10-year benchmark were seen selling at a profit, thereby limiting gains, dealers said.

At the auction, demand is seen firm for the 7.02%, 2027 bond, especially after the Reserve Bank of India's proposal to tweak the Basel-III norms pertaining to the liquidity coverage ratio, dealers said. The draft guidelines have spurred demand for short-term bonds from banks, as they will have to maintain large amounts of government bonds as a percentage of deposits.

In addition to this, increased rate cut bets, both in the US and in India, and reduction in the government's net short-term borrowings in the Union Budget 2024-25 (Apr-Mar) has paved the way for robust demand for short-term bonds, dealers said.

Meanwhile, the market was sceptical of the demand for the new 2034 green bond as they fear the Reserve Bank of India may reject bids at the green bond auction today if it does not receive any 'greenium' on the paper. Therefore, the participation is seen as less aggressive in this section, dealers said. Greenium refers to the premium investors are prepared to pay for green bonds due to its impact on sustainability.

At the previous auction of a green bond on May 31, the RBI rejected all bids for 60 bln rupees worth of a new 10-year green paper as the government did not want to pay a yield higher than on the 10-year benchmark bond, dealers said.

Further, the market was divided on demand for the long-term bond. Some said it might see robust demand from insurers and pension funds, while others said that since the new issuances of the 30-year paper are not included in fully accessible route government securities, investors may bid on tail, dealers said. Since the notification, traders who were active in this segment were seen missing, dealers said.

Meanwhile, the yield on the 10-year benchmark US Treasury note fell to 3.95% after softer-than-expected economic data in the US, boosting hope of a rate cut in the world's largest economy by September. According to the CME Fedwatch, there is a 100% chance of a 25-basis-point cut in the interest rate in the US in September.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 173.50 bln rupees, against 139.75 bln rupees at 0930 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-6.94%. (Anupreksha Jain)

India Gilts: Seen up on fall in US ylds; traders await gilt auction

MUMBAI – Prices of government bonds are seen opening higher as US Treasury yields fell below the psychologically crucial mark of 4.00%, dealers said. However, traders may refrain from placing aggressive bets due to caution ahead of a 220-bln-rupee gilt auction. 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.86-6.93%, against 6.92% on Thursday. Meanwhile, the yield on the 10-year benchmark US Treasury note fell to 3.95% from 4.05% at the time the Indian market closed on Thursday. 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.

US Treasury yields fell due to softer than expected economic data from the US on Thursday, strengthening hope of a rate cut by the US Federal Reserve in September. The data came after US Federal Reserve Chair Jerome Powell indicated the possibility of a rate cut if inflation continued on its downward path. According to the CME Fedwatch, there is a 100% chance of a 25-basis-point cut in the interest rate in the US by September.

The Institute for Supply Management's manufacturing purchasing managers index for the US fell to 46.8 last month from 48.5 in June. Moreover, weekly jobless claims in the US rose to an 11-month-high. Initial claims for state unemployment rose 14,000 to a seasonally adjusted figure of 249,000 in the week ended Saturday. It was more than the forecast of 236,000 claims in a Reuters poll of economists. 

Back home, traders may remain cautious ahead of the weekly gilt auction, dealers said. Although the auction is likely to sail through, it may not translate into any sharp movement in the secondary market as the bonds up for auction are off-the-run gilts, dealers said. At the auction, the government will sell 60 bln rupees of the 7.02%, 2027 bond, 60 bln rupees of a new 2034 green bond, and 100 bln rupees of a new 2054 bond.

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, dealers said. (Anupreksha Jain)

End

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

Edited by Aditya Sakorkar

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