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Informist, Wednesday, Aug 14, 2024

By Aaryan Khanna

MUMBAI – Government bond prices ended higher today tracking a fall in US Treasury yields. Some banks placed bets that easing US inflation would make the case for a sharper rate cut in September, while traders covered short bets, dealers said.

The 10-year benchmark 7.10%, 2034 bond closed at 101.68 rupees, or 6.86% yield, against 101.53 rupees, or 6.88% yield, on Tuesday.

Recent prints on US jobs and inflation have made the case that the world's largest economy is slowing faster than anticipated by US Federal Reserve officials, dealers said. The latest data point to add to that narrative was the US Producer Price Index for July. US producer prices rose 2.2% on year in July, against 2.3% expected in a Dow Jones poll. The annual core Producer Price Index rose 2.4% in July, well short of analysts' estimate of 2.7%.

The yield on the 10-year benchmark US Treasury note fell to 3.85% from 3.89% at the time the Indian market closed Tuesday. A fall in US yields widens the interest rate differential between the haven asset and emerging market debt, making the latter more appealing to foreign investors.

The reaction in bond prices in India was limited as the print did not move the needle on rate-cut expectations. According to the CME FedWatch tool, Fed funds futures still indicated a split in view between a 25- and a 50-basis-point rate cut by the US Federal Open Market Committee in September, similar to Tuesday. However, US rate expectations are sure to change if CPI data for July also misses estimates, dealers said.

"The market is trading with a bullish bias," a dealer at a private bank said. "If the hard landing view gets strengthened (in the US), then we may be able to break through the 6.83% level (on the 10-year gilt yield)." For the domestic 10-year benchmark yield, 6.83% is a crucial level to break on the technical charts, dealers said.

According to a Dow Jones poll, US core and headline CPI are both likely to have risen 0.2% on month in July. On an annual basis, headline inflation is likely to be unchanged from June at 3.0%, while core inflation may print at 3.2% on year. In data released after market hours, US CPI inflation was in line with expectations.

Owing to a large liquidity surplus in the banking system and increased odds of rate cuts in the US and in India, short-term bonds have gained traction. The liquidity in the banking system was 1.26 trln rupees, according to data from the Reserve Bank of India. Although the surplus has narrowed over the last few days, it has remained above the 1-trln-rupee mark, aiding demand for short-term bonds, dealers said.

Banks have also been buying short-term bonds to shore up high quality liquid assets ahead of the implementation of the RBI's proposed norms on liquidity coverage ratio. These are likely to require banks to hold more of such assets on their balance sheets. Some mutual fund houses have also been buying up short-term gilts to invest their excess cash, dealers said. Mutual funds have bought 93.11 bln rupees of bonds so far in August, according to Clearing Corp of India Ltd.

Private banks may have covered their short bets ahead of the US CPI data, dealers said. Primary dealers trimmed their bond holdings to make room for the 340-bln-rupee weekly gilt auction on Friday, with Indian financial markets shut Thursday for Independence Day, dealers said. The government will sell 110 bln rupees of the 7.02%, 2031 bond, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.46%, 2073 gilt through auction at 1030-1130 IST on Friday.

"The volumes really came up only in the second half. A lot of short covering from the trading side was happening, mostly because of US CPI data," a dealer at a state-owned bank said.

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 728.55 bln rupees, higher than 413.50 bln rupees on Tuesday. There were no trades using the wholesale digital rupee pilot today, against two trades worth 100 mln rupees on Tuesday.

OUTLOOK

Indian financial markets are shut Thursday for Independence Day. On Friday, bond prices may open steady ahead of the 340-bln-rupee weekly gilt auction at 1030-1130 IST, dealers said.

Any sharp movement in US Treasury yields and crude oil prices may also lend cues at the opening. US CPI inflation, at 0.2% on month, was in line with expectations and did not significantly change the view on US interest rates, dealers said. Core CPI inflation rose 0.2% on month and 3.2% on year, again in line with expectations, while the headline inflation was up 2.9% on an annual basis, slightly lower than the expected 3.0%.

Traders may book profits Friday after prices rose today, as the expectations of a 50-basis-point rate cut in the US had fallen to 41.5% from above 50% before the reading, according to the CME FedWatch tool. Demand for gilts at the auction is expected to be robust, dealers said.

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.83-6.90% during the day.

India Gilts: Remain up; traders cover short bets ahead of US Jul CPI 

MUMBAI--1510 IST--Prices of government bonds remained up on a fall in US Treasury yields. Traders were covering their short bets, betting that US CPI data for July would be softer than expected, dealers said.

The yield on the 10-year benchmark US Treasury note fell to 3.85% from 3.89% at the time the Indian market closed on Tuesday. US yields fell after softer-than-expected US Producer Price Index data for July. A repeat from the US CPI data could cement expectations of a 50-basis-point rate cut in the US in September, dealers said.

"For the past few days...traders who are seeing lower US CPI data are covering their bets, and it may be possible that we may close at 101.67-101.68 rupees (on the 10-year benchmark)," a dealer at a primary dealership said. According to a Dow Jones poll, US core and headline CPI are both likely to have risen 0.2% on month in July. On an annual basis, headline inflation is likely to be unchanged from June at 3.0%.

Owing to a large liquidity surplus in the banking system and increased odds of rate cuts in the US and in the domestic economy, short-term bonds have gained traction. The liquidity in the banking system was 1.26 trln rupees, according to the data from the Reserve Bank of India. Although the surplus has narrowed over the last few days, it has still remained above the 1-trln-rupee mark, thereby aiding the demand for short-term bonds, dealers said. Moreover, banks have been buying short-term bonds to shore up high quality liquid assets, ahead of the implementation of the RBI's proposed norms on liquidity coverage ratio. This is likely to require banks to hold more of such assets on their balance sheets.

"Every segment of the market is buying short-term right now," a dealer at a state-owned bank said. "Not just mutual funds, even PSUs (state-owned banks) are selling long-term bonds and buying short-term gilts."  Foreign banks and some mutual funds were on the buying side, while primary dealers and some private banks were on the selling side, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 495.65 bln rupees, against 275.25 bln rupees at 1530 IST on Tuesday. For the rest of the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.84-6.90%.  (Anupreksha Jain)

India Gilts: Remain up; traders cautious ahead of US CPI data

MUMBAI--1228 IST--Prices of government bonds moved in a narrow range after the initial rise as traders remained cautious of placing aggressive bets ahead of the US CPI July data, scheduled to be released at 1800 IST, dealers said. Moreover, some traders sold gilts at a profit, keeping a check on the rise in gilt prices.

"Nothing much is happening in the market," a dealer at a private bank said. "The market has been stuck at opening levels, and this is the usual trading behaviour ahead of any crucial economic data."

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. According to a Dow Jones poll, US core and headline CPI are both likely to have risen 0.2% on month in July. On an annual basis, headline inflation is likely to be unchanged from June at 3.0%

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. However, others said that some small state-owned banks were on the selling side. 

In addition to this, primary dealers were also seen on the selling side in order to make room to buy at the weekly gilt auction, dealers said. On Friday, the government will sell 110 bln rupees of the 7.02%, 2031 bond, 120 bln rupees of 7.23%, 2039 bond, and 110 bln rupees of the 7.46%, 2073 gilt. 

On the global front, a fall in US Treasury yields aided gilt prices, dealers said. The upcoming US CPI data is crucial for the market as it is likely to provide them with more clarity on when to expect rate cuts in the US, dealers said. In the last US Federal Open Market Committee meeting in July, policymakers kept interest rates unchanged. But US Federal Reserve Chair Jerome Powell said that a rate cut was discussed at the meeting, and the committee indicated it was looking at risks to both jobs and inflation, dealers said. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 269.90 bln rupees, against 139.90 bln rupees at 1230 IST on Tuesday. 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: Rise as US yields fall; US Jul CPI data in focus

MUMBAI--0956 IST--Prices of government bonds rose on the back of a fall in US Treasury yields, dealers said. However, the gains were capped as traders across segments sold gilts at a profit amid lucrative yield levels.

"Right now, I think the market is walking on a tight rope. Nobody is going aggressive either about selling or on buying," a dealer at a state-owned bank said. "The market has become a little risk-aversive. They do want to take a hit if it reacts sharply."

Private banks and foreign banks are expected to continue with their selling momentum, dealers said. Private banks and foreign banks were net sellers for the last four trading sessions, according to data from Clearing Corp of India Ltd. Dealers said that private banks were selling Separate Trading of Registered Interest and Principal of Securities, or STRIPS. 

Mutual funds were the net buyers for the last three trading sessions, according to Clearing Corp of India. Dealers said that large hybrid fund managers are sitting on huge cash stocks, hence they have been deploying the same in the bond market. Most of the buying from mutual funds has been concentrated in short-tenure bonds such as 6.18%, 2024, and T-bills, dealers said.

On the global front, the yield on the 10-year benchmark fell to 3.86% from 3.89% at the Indian market close on Tuesday. US yields fell after softer-than-expected US Producer Price Index data for July. 

The focus has now turned to US CPI data for July, scheduled to be released today at 1800 IST. According to a Dow Jones poll, US core and headline CPI are both likely to have risen 0.2% on month in July. On an annual basis, headline inflation is likely to be unchanged from June at 3.0%, while core inflation for July is seen at 3.2%, against 3.3% in the previous month.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 129.60 bln rupees, against 47.25 bln rupees at 0930 IST on Tuesday. 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 higher on fall in US yields after softer Jul PPI data

MUMBAI – Prices of government bonds are seen opening higher today as US Treasury yields fell on softer-than-expected US Producer Price Index data for July. Lower readings of the US Producer Price Index further cemented the hopes of rate cuts in the US, dealers said.

However, gains may be limited as traders are likely to sell gilts at a profit. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.83-6.90%, against 6.88% on Tuesday. 

The Producer Price Index for final demand in the US rose 2.2% on a yearly basis in July, according to US Bureau of Labor Statistics data. This reading was below the market expectation of 2.3% and the 2.7% increase in June. The annual core PPI rose 2.4% in July, short of analysts' estimate of 2.7%.

The reading did not move the needle on US rate cut expectations, but was another data point which showed that the US rate cut cycle would begin in September, dealers said. According to the CME FedWatch tool, Fed funds futures reflect an almost even split between expectations of 25- and 50-basis-point by the US Federal Open Market Committee in September.

Following the data, yield on the 10-year benchmark fell to 3.86% from 3.89% at the Indian market close on Tuesday. A fall in US yields widens the interest rate differential between haven asset and emerging market debt, making the latter more appealing to foreign investors. 

During the day, trade volumes are expected to remain dull as traders may refrain from placing large bets ahead of the US CPI data for July. The US CPI data is scheduled to be released at 1800 IST. As per a poll by Reuters, headline inflation is expected to accelerate 0.2% on month in July, but remain unchanged at 3% on a year-on-year basis.

Dealers said that mutual funds are expected to continue with their buying spree today as well. The buying from mutual funds is expected to be concentrated in short-term bonds, they said.  (Anupreksha Jain)

End

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

Edited by Rajeev Pai

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