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Informist, Tuesday, Aug 13, 2024

By Siddhi Chauhan and Anupreksha Jain

MUMBAI – Government bond prices ended steady today on caution ahead of key data points in the US, dealers said. US producer price index inflation data was due after market hours, while US CPI data is due on Wednesday. 

The 10-year benchmark 7.10%, 2034 bond closed at 101.53 rupees, or 6.88% yield, against 101.52 rupees, or 6.8801% yield, on Monday.   

As per the estimate of a poll conducted by Reuters, the US CPI report is expected to show headline inflation accelerated 0.2% on month in July, but remained unchanged at 3% on a year-on-year basis. Traders look forward to the US CPI data as it will provide insights into the possible rate cut trajectory of the US Federal Reserve.

A softer print will cement the expectation of aggressive rate cuts in the world's largest economy. Currently, as per the CME FedWatch tool, 51.5% Fed Fund futures traders are seeing a chance of 50-basis-point rate cuts in the Fed's September meeting, while the remaining traders expect a 25-bps rate cut. If inflation is higher than expected, rate cut hopes in the US may be trimmed to 75 bps by the end of 2024, against some brokerages calling for over 100 bps of rate cuts currently.

If the US inflation data falls below market expectations, the yield on the 7.10%, 2034 bond may fall to 6.85%, dealers said. However, if it comes higher-than-expected, the yield on the 10-year benchmark may rise to 6.90%, dealers said. Private banks and foreign banks sold their bonds at a profit, leading the 10-year benchmark bond's price to fall below the previous day's close, dealers said. 

The fall in prices was limited as state-owned banks bought the 10-year benchmark as the yield levels were considered lucrative, dealers said. "The yield of 6.89% is a buying zone for the PSUs (state-owned banks), this is lending some support to the prices," a dealer at a state-owned bank said. "Market is now awaiting US CPI data as it will lend cues on the timeline of rate cuts in the US."

A softer-than-expected India's July headline inflation print did not lead to any sharp reaction in the market as it did not significantly change the perception of rate cuts in India, dealers said.

Although the market drew comfort from the lower-than-expected domestic headline inflation print for July, it did not lead to any shift in rate cut views for the economy, dealers said. A rate cut by the Reserve Bank of India's Monetary Policy Committee by February is fully priced in, while a segment of the market expects a possible rate cut earlier, in December, they said.

"This data was largely due to a high base effect, and it is just one of its kind," a dealer at a private bank said. "So, we need to examine inflation prints for subsequent months as well." India's headline CPI inflation for July came in at 3.54%, below the RBI's medium-term target of 4% for the first time in nearly five years, mainly on account of a statistical effect of a high base.

With the RBI's quarterly projection, dealers said that the inflation prints until September may be on an upward trajectory as the statistical effect of a high base wears off. This may prevent the Monetary Policy Committee from softening its "withdrawal of accommodation" stance even at the October policy review, dealers said. The positive base effect falls off in September, and Oct-Dec inflation is seen at 4.7%, well above the RBI's target. 

On the other hand, core CPI inflation – which excludes volatile elements such as food and fuel – rose to 3.4% in July from near-record lows of 3.1% in June. The expected rise in headline inflation to above 4% after the favourable base effect fades starting September is also likely to keep the Monetary Policy Committee unconvinced that rate cuts are needed immediately, dealers said.

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 413.50 bln rupees, lower than 237.55 bln rupees on Monday. There were two trades worth 100 mln rupees which used the wholesale digital rupee pilot today, the same as the last four days.

OUTLOOK

On Wednesday, bond prices may open steady ahead of US CPI inflation data. As per the estimate of a poll conducted by Reuters, the headline inflation is expected to accelerate 0.2% on month in July, but remain unchanged at 3% on a year-on-year basis.

Bonds may take cues from the US producer price index data for July, scheduled to be released post market hours, and the US CPI data is scheduled for Wednesday.

Traders are looking forward to the US CPI data and producer price index inflation data, dealers said. The following two data points are likely to provide fresh insights into the possible rate cut trajectory of the US Federal Reserve, they said.

The market is likely to remain watchful of tensions in West Asia as the US warned of an imminent attack by Iran on Israel. Iran, a major oil producer, is likely to retaliate after the killing of a Palestinian Hamas commander on its soil, US officials have warned. The conflict in West Asia has only been broadening in recent weeks after militant group Hamas attacked Israel last October. This has pushed up near-term Brent crude futures above $80 a barrel.

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 6.83-6.90% during the day.

India Gilts: Tad down as some traders book profit; US key data eyed

MUMBAI--1439 IST--Prices of government bonds were a tad down as some traders sold gilts at a profit ahead of key US economic data, dealers said. Additionally, a slight intraday rise in US Treasury yields during the day also weighed on gilts.

However, losses were limited as state-owned banks stepped up purchases amid lucrative yield levels, dealers said. Private and foreign banks were continuing to sell gilts in low quantities, dealers said. For the last three trading sessions, foreign and private banks were the net sellers, according to the data by Clearing Corp of India Ltd.

"Everyone is long enough and, owing to lack of domestic cues, nobody wants to take positions aggressively," a dealer at a private bank said. "It is now US CPI-guided market as it may change the odds of rate cuts in the US." Odds of a 50-basis point cut in the interest rate in the US by September have risen to 50% from 32% a week ago, according to the CME Fedwatch tool. 

Foreign banks likely sold their bonds at a profit as they expected the US CPI data to be lower-than-expected, dealers said. Meanwhile, private banks were seen trimming their bond holdings after they bought gilts aggressively following the notification from the Reserve Bank of India to tweak Basel-III-liquidity coverage ratio norms, dealers said. 

During the day, the 10-year US benchmark Treasury note rose to the day's high of 3.93%. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors.

Traders are looking forward to the US CPI data and producer price index inflation data, dealers said. The following two data points are likely to provide fresh insights into the possible rate cut trajectory of the US Federal Reserve, they said. The US producer price index for July is scheduled to be released post market hours at 1800 IST, and the US CPI data is scheduled for Wednesday. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 158.05 bln rupees, against 148.85 bln rupees at 1530 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.86-6.90%.  (Anupreksha Jain)

India Gilts: Remains steady; traders avoid bets ahead of key US data

MUMBAI--1354 IST--Prices of government bonds were steady and stayed in a thin band today as traders avoided placing aggressive bets on caution ahead of key data from the US, dealers said. US producer price index data is due post market hours today, while crucial US CPI data will be released on Wednesday. 

"The market is trading in a narrow range right now because we don't really have a trigger to trade on. Everyone is waiting for data from the US," a dealer at a state-owned bank said. "Amid thin trade, we are seeing some buying and selling from traders, but it is difficult to say who is on what side." 

Caution ahead of key data prints resulted in keeping the day's activity, dealers said. This prompted foreign banks to sell bonds at a profit despite a fall in US Treasury yields, dealers said. 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 yield on the 10-year benchmark US Treasury note fell to 3.92% today from 3.95% at the end of Indian market hours on Monday. 

Foreign banks likely sold their bonds at a profit as they expected the US CPI data to be lower-than-expected, dealers said. As per the estimate of a poll conducted by Reuters, the US CPI report is expected to show headline inflation accelerated 0.2% on month in July, but remained unchanged at 3% on a year-on-year basis.

If the US inflation print for July comes lower-than-expected, then the yield on the 7.10%, 2034 bond may fall to 6.85%, dealers said. However, if it comes higher-than-expected, the yield on the 10-year benchmark may rise to 6.90%, dealers said. Amid thin trade, some state-owned banks were said to have picked up the 10-year benchmark due to attractive yield levels, dealers said. The yield level of 6.88% is considered lucrative. 

Meanwhile, on the domestic front, a softer India Jul CPI data failed to lend significant cues to the market, dealers said. "Nothing major is happening right now, our CPI data has also failed to give trigger because it was already priced in by the market," a dealer at another state-owned bank said. "The fall did not matter that much because it was because of a higher base effect." India's headline CPI inflation for July came in at 3.54%, below the Reserve Bank of India's medium-term target of 4% for the first time in nearly five years, mainly on account of a statistical effect of a high base.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 158.05 bln rupees, against 137.80 bln rupees at 1430 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.86-6.90%.  (Siddhi Chauhan)

India Gilts: Tad up; traders sell gilts at profit, cap gains

MUMBAI--0933 IST--Prices of government bonds were a tad higher today owing to softer-than-expected India's Jul CPI data, dealers said. However, gains were limited as traders sold gilts at a profit, dealers said. During the day, prices are expected to move in a thin band as traders are likely to avoid placing aggressive bets ahead of the US CPI data for July, scheduled to be released on Wednesday.

Although the market drew comfort from lower-than-expected domestic headline inflation print for July, it did not lead to any shift in rate cut views for the economy, dealers said. A rate cut by the Reserve Bank of India's Monetary Policy Committee by February is fully priced in, while a segment of the market expects a possible rate cut in December, they said.

"Before the CPI data was out, the market was a little cautious as the RBI had guided towards higher inflation for Jul-Sep," a dealer at a state-owned bank said. "But with such lower estimates this time, we can afford a little higher CPI prints for the next two months." According to the median of estimates of 15 economists polled by Informist, CPI inflation in July was seen falling to a 59-month low of 3.7% from 5.08% in June.

India's headline CPI inflation for July came in at 3.54%, below the Reserve Bank of India's medium-term target of 4% for the first time in nearly five years, mainly on account of a statistical effect of a high base.

In the secondary market, private banks, mutual funds and some foreign banks were seen on the buying side, while state-owned banks were seen selling gilts at a profit, dealers said. Mutual funds were the top net buyers for the last two trading sessions, according to the data of the Clearing Corp of India Ltd. 

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 3.91% today from 3.95% at the end of Indian market hours on Monday.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 51.30 bln rupees, against 37.35 bln rupees at 0930 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.86-6.90%.  (Anupreksha Jain)

India Gilts: Seen up as Jul CPI softer than view; gains seen capped

MUMBAI – Government bond prices are seen opening higher after India's CPI inflation for July was lower than expected. The rise in prices is likely to be limited as it does not significantly change the market's perception of rate cuts in India, dealers said.

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.83-6.90%, against 6.88% on Monday. Bond prices ended steady, and trade volumes were muted, ahead of the release of the inflation data at 1730 IST on Monday.

India's headline CPI inflation for July came in at 3.54%, below the Reserve Bank of India's medium-term target of 4% for the first time in nearly five years, mainly on account of a statistical effect of a high base. According to the median of estimates of 15 economists polled by Informist, CPI inflation in July was seen falling to a 59-month low of 3.7% from 5.08% in June.

With the July CPI inflation print, headline inflation in the September quarter may fall below the central bank's estimates. Some dealers were of the view that this could prompt a quicker easing of policy rates than earlier expected. The RBI had raised its CPI inflation projection for Jul-Sep by 60 bps to 4.40% at last week's monetary policy review.

On the other hand, core CPI inflation – which excludes volatile elements such as food and fuel – rose to 3.4% in July from near-record lows of 3.1% in June. The expected rise in headline inflation to above 4% after the favourable base effect fades starting September is also likely to keep the Monetary Policy Committee unconvinced that rate cuts are needed immediately, dealers said.

An overnight fall in US Treasury yields may also aid gilt prices, after the haven asset was in favour following fears of widening conflict in West Asia. The yield on the 10-year benchmark US Treasury note fell to 3.91% in Asian trade today from 3.95% at the end of Indian market hours on Monday. 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 yield on the domestic 10-year gilt is unlikely to fall below the psychologically crucial 6.85% mark as state-owned banks may look to sell bonds at a profit, dealers said. However, some banks said that their portfolios have become lighter and profit booking activity may not be very aggressive.  (Aaryan Khanna)

End

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

Edited by Tanima Banerjee

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