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Informist, Monday, Aug 5, 2024

By Anupreksha Jain

MUMBAI – Prices of government bonds ended sharply higher as US Treasury yields tumbled after weaker-than-expected US non-farm payrolls data, dealers said. Signs that the US monetary policy may need to be eased more quickly than earlier expected have prompted traders to bet aggressively that the Reserve Bank of India's Monetary Policy Committee will change its stance to "neutral" this week from "withdrawal of accommodation", they said.

The 10-year benchmark 7.10%, 2034 bond closed at 101.66 rupees, or 6.86% yield, against 101.42 rupees, or 6.89% yield on Friday. At the day's low, the benchmark yield hit its lowest level since Mar 31, 2022, while the yield on the five-year benchmark, 7.37%, 2028 bond fell as low as 6.77%, the lowest since Apr 27, 2022.

US yields fell after the July non-farm payrolls report showed an increase of 114,000 jobs last month which was far less than the 185,000 that economists in a poll by Dow Jones had forecast. Moreover, the US unemployment rate in July rose to a near-three-year high of 4.3%, data released Friday showed. The jobs data also flashed a signal of a recession in the US.

The yield on the 10-year US benchmark Treasury note fell to a low of 3.68% against 3.96% from 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 data has further cemented investors' hope that the US Federal Open Market Committee needs to cut rates by larger quantum than 25 basis points, as the economy was getting worse quicker-than-expected, dealers said. According to the CME FedWatch tool, the odds of a 50-basis point cut in the interest rate by September has been fully factored in, from an 11.4% probability last week, while some even see a 75 bps cut in the interest rate by September. 

Amid the possibility of a quicker-than-expected rate cuts in the US, the market is seeing a possible cut in India's repo rate by December. This view would firm up if the domestic rate-setting panel changes its policy stance to "neutral" this week, dealers said. The Reserve Bank of India's rate-setting panel has a three-day meeting that starts on Tuesday.

Traders across market segments who had bought gilts at lower prices over the past month were selling government bonds at a sizeable profit, limiting some gains today, dealers said. The yield on the 10-year benchmark gilt has fallen from a high of 7.02% in July, and it dipped below the crucial 6.85%-yield mark before giving up some gains. 

"It's like 10 basis points fall in 10-year gilt yield (referring to purchases at 6.95% yield), any trader who had bought at a higher level will definitely exit his position," a dealer at a state-owned bank said. "It is a good money-making opportunity for him. US yields touched the day's low of 3.68%, OIS (overnight indexed swap) has good receiving (fixed rates), so everything is supporting gilts." 

The market is widely expecting the domestic-rate setting panel to change its stance, which led to traders buying gilts through the day. However, some traders said that owing to a higher June CPI inflation print, the policy committee may retain its stance, but comments from RBI Governor Shaktikanta Das may set the stage for easing monetary policy in the upcoming meetings, dealers said. 

Traders are looking for a formal backing to actions already taken by the RBI. The central bank has refrained from significantly draining liquidity on a durable basis, and banking system liquidity had swollen to 2.78 trln rupees.

If the Monetary Policy Committee does not change its stance and RBI Governor Shaktikanta Das continues to warn of domestic inflationary pressures, the 10-year gilt's yield may rise to around 6.9%. Moreover, if the RBI announces a calendar for open market bond sales, the benchmark yield may rise to 7.10% at the worst, dealers said.

With US monetary policy expected to ease on recessionary concerns, traders do not anticipate the RBI announcing a calendar of open market operations, but it may continue to sell gilts in the secondary market, dealers said. Given favourable demand and supply dynamics, the limited quantity of sales had a negligible impact on the market sentiment, dealers said. Between Jun 8 and Jul 26, the central bank net sold 101.05 bln rupees worth of gilts through open market operations.

"The September rate cut (in the US) is happening 100%," a dealer at a private bank said. "In India we may see 2 cuts either in December and February or in February and at the beginning of the next financial year."

On the other hand, some dealers said even if the US Fed cuts interest rates in September, a cut in domestic policy may only happen in February as retail inflation in Oct-Mar is seen higher than the central bank's medium-term target of 4%, which may prevent the rate-setting committee from changing its stance. CPI inflation rose to 5.08% in June and traders expect food inflation to be high in July as well, even if the headline inflation falls to below 4% due to the statistical effect of a high base.

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

Since the release of the Union Budget for 2024-25 (Apr-Mar) on Jul 23, bond market trading volumes have shot up as investors are keen to lock in current yield levels. According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 1.04 trln rupees, sharply higher than 709.10 bln rupees on Friday. There were no trades carried out using the wholesale digital rupee pilot today, the same as on Friday.

OUTLOOK

On Tuesday, bond prices are likely to open steady on caution as traders may remain on the sidelines ahead of the outcome of the three-day meeting of the Monetary Policy Committee on Thursday, dealers said.

Traders are expecting the committee to change its stance to "neutral" from "withdrawal of accommodation". However, if the domestic-rate setting panel does not change the stance, it may trigger some selling in the market and the yield on the 10-year benchmark may inch to 6.90%.

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: Give up some gains on profit-booking by PSU banks

MUMBAI--1516 IST--Government bonds gave up some gains as state-owned banks continued to sell gilts at a profit, dealers said. Gilt prices remained up following a sharp fall in US Treasury yields, dealers said. The trade volumes rose sharply as traders placed large bets, anticipating a softer monetary policy outlook at the Reserve Bank of India's Monetary Policy Committee meeting, starting Tuesday.

"The market has started factoring in a "neutral" stance in this policy meeting," a dealer at a state-owned bank said. "If the committee retains its stance, then we may see some sell-off and the yield on the 10-year bond may go back to 6.90%."

Considering the price action, traders said the profit booking may have become more widespread since state-owned banks have been selling gilts since early in the day and also over the past week, dealers said. With the 10-year gilt yield dipping below 6.85% and immediately recovering, traders may be awaiting the outcome of the MPC meeting on Thursday to press on with further gains. Possible measures by overseas regulators to the stock market crashes since Friday are also awaited in the next few days, dealers said.

As the odds of a 50-basis point cut in interest rates in the US by September has gone up to 95.5% from 11.4% a week ago, according to the CME Fedwatch data, the market is seeing a possible cut in India's repo rate by December. This view would firm up if the domestic rate-setting panel changes its policy stance to neutral this week, dealers said. 

However, some dealers said even if the US Fed cuts interest rates in September, a cut in domestic policy is likely to happen only in February as retail inflation in Oct-Mar is seen higher than the central bank's medium-term target of 4%, which may prevent the rate-setting committee from changing its stance. CPI inflation rose to 5.08% in June and traders expect food inflation to be high in July as well, even if the headline inflation falls to around 4% due to the statistical effect of a high base.

In the US, key data points on growth, labour, and inflation fronts have indicated a slowdown in the world's largest economy, whereas in India, the growth continues to be robust. That may hold back the MPC from adopting a softer monetary policy outlook, they said. 

The yield on the 10-year US benchmark Treasury note fell to 3.76% from 3.98% at the time the Indian market closed on Friday. The US unemployment rate in July rose to a near three-year high of 4.3%, data released Friday showed.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 869.75 bln rupees, against 446.75 bln rupees at 1530 IST on Friday. For the rest of the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.83-6.90%. (Anupreksha Jain)

India Gilts: Remain sharply up; traders bet on MPC stance change

MUMBAI--1204 IST--Prices of government bonds remained sharply up as US Treasury yields slumped, dealers said. Traders bet aggressively on a change in stance of the Reserve Bank of India's Monetary Policy Committee at its meeting this week, after signs that the US monetary policy may ease much quicker than expected, dealers said.

According to the CME FedWatch tool, there is a 92.5% chance of a 50-basis-point cut in the interest rate in the US by September, against only 25 bps priced in last week. Taking cues from the US, the domestic rate-setting panel is likely to change its stance to "neutral" from the current "withdrawal of accommodation", dealers said.

The yield on the 10-year US benchmark Treasury note fell to a low of 3.68% against 3.98% from the time the Indian market closed on Friday. The US unemployment rate in July rose to a near three-year high of 4.3%, data released Friday showed.

"Equity markets are crashing, and bond markets are rallying, so we are inviting a global slowdown," a dealer at a private bank said. "Chances of a stance (change) are very high (on Thursday) because a US rate cut in September is very certain."

India's benchmark bond yields traded at levels last seen in Mar-Apr 2022 before the Monetary Policy Committee hiked the policy repo rate by 250 basis points to the current 6.50%. Already, the RBI has allowed the liquidity surplus in the banking system to rise to multi-year highs, and chances of an open market operation sale calendar, as some traders had feared, are receding, dealers said. Liquidity in the banking system rose to a 2.78-trln-rupee surplus on Saturday, the most since Jul 6, 2022.

In October, when RBI Governor Shaktikanta Das had proposed selling gilts in the open market to mop up liquidity, US Treasury yields rose while domestic bond yields were static and didn't react as much. Now, the central bank may not impound durable liquidity at a time when US and European policy rates are set to fall, dealers said.

The central bank may still continue with its open market sales in the secondary market to mop up liquidity in small quantities, dealers said. Between Jun 8 and Jul 26, the central bank net sold 101.05 bln rupees worth of gilts through open market operations. The limited quantity of sales, and the large appetite for bonds, prevented a negative impact on the market, dealers said.

In this context, Das is expected to signal that domestic liquidity conditions will be easier after the stance change at the outcome of the three-day meeting on Thursday, dealers said. Comments on liquidity management from Das will be assessed carefully, dealers said.

If the Monetary Policy Committee does not change its stance and RBI Governor Das continues to warn of domestic inflationary pressures, the 10-year gilt's yield may rise to around 6.9%. Moreover, if the RBI announces a calendar for open market bond sales, the benchmark yield may rise to 7.10% at the worst, dealers said.

In the secondary market, foreign banks, private banks, and foreign investors were seen on the buying side, while state-owned banks and primary dealers were seen on the selling side, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 480.00 bln rupees, against 223.40 bln rupees at 1130 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.83-6.90%. (Anupreksha Jain)

India Gilts: Up as US Treasury yields tumble due to weak jobs data

MUMBAI--1020 IST--Prices of Indian government bonds surged as US Treasury yields fell after weaker-than-expected US non-farm payrolls data, dealers said. Gains on the 7.10%, 2034 bond were limited as state-owned banks and primary dealerships sold their bonds at a profit, dealers added. The 10-year gilt yield, at its lowest level today, was at 6.85%, the least since Mar 31, 2022.

US jobs data, which was released post market hours on Friday, saw an increase of 114,000 jobs last month, far less than the 185,000 that economists in a poll by Dow Jones had forecast. Meanwhile, the unemployment rate rose to 4.3%, the highest in nearly three years, since October 2021. Traders were of the view that this would necessitate sharper-than-expected rate cuts, with several US banks, including strategists at Citi and Goldman Sachs, calling for 125 basis points of rate cuts in 2024, against 50 bps priced into the futures market before.

This resulted in the 10-year US yield falling by 20 basis points since the end of Indian market hours on Friday, thereby attracting foreign investors to India's bonds, dealers said. The yield on the 10-year benchmark US Treasury note was at 3.76%, the lowest in a year. The differential between the 10-year US Treasury yield and that on India's benchmark bond rose to its highest since February, at 310 basis points. 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 major buying right now is coming from foreign banks and private banks," a dealer at a state-owned bank said. "The remaining segment is booking profit as they have bought the bonds at higher yield levels."

Private banks were on the buying side, expanding their balance sheets due to proposed regulatory norms on liquidity coverage ratio. They don't see the yields on the 10-year benchmark retracing from current levels, and wanted to lock in current yield levels, dealers said. Even the three-day Monetary Policy Committee meeting that starts on Tuesday is not likely to push up bond yields, they said.

"People want to remain long at these levels," a dealer at a private bank said. "There is no upside risk (in yield terms), to the market right now."

However, caution before the domestic policy meeting may keep the rise in prices limited, and the 10-year yield may not fall below 6.85%, dealers said. State-owned banks and primary dealerships may also continue to sell their bonds at a profit. As per data from the Clearing Corp of India, state-owned banks have been on the selling side for five consecutive trading sessions, with the sales totalling 192.59 bln rupees.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 166.05 bln rupees, against 132.50 bln rupees at 0930 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.83-6.90%. (Siddhi Chauhan)

India Gilts: Seen higher on fall in US yields after weak jobs data

MUMBAI – Prices of government bonds are seen opening higher due to a fall in US Treasury yields after the release of softer-than-expected non-farm payroll data, dealers said. 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.83-6.90%, against 6.89% on Friday. The yield on the 10-year benchmark US Treasury note fell to 3.79%, from 3.96% 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.

US Treasury yields fell after the July non-farm payrolls report showed an increase of 114,000 jobs last month which was far less than 185,000 that economists in a poll by Dow Jones had expected. Meanwhile, the unemployment rate rose to 4.3%, the highest in nearly three years, since October 2021.
 

The data further cemented investors' fears that the US economy was slowing more rapidly than anticipated and the Federal Reserve had erred by keeping rates steady. The US Federal Open Market Committee on Wednesday kept the federal funds target rate unchanged at 5.25-5.50% at its July meeting.

After the data, 73.5% of Fed fund futures traders expect a rate cut of 50 basis points at the Fed's September meeting from 22% in the prior session, according to the CME's FedWatch Tool.

Domestic bond yields may fall much less than those in the US as the Reserve Bank of India is not seen easing monetary policy as swiftly as the Fed. The 10-year yield may not fall below 6.85%, dealers said. Traders will look forward to the Reserve Bank of India's Monetary Policy Committee's three-day meeting that will start from Tuesday. (Siddhi Chauhan)

End

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

Edited by Deepshikha Bhardwaj

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