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Informist, Friday, Aug 23, 2024

By Aaryan Khanna

NEW DELHI – Government bond prices ended lower as traders trimmed their holdings on caution ahead of US Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Economic Symposium at 1930 IST. The result of the 230-bln-rupee weekly gilt auction was on expected lines, though traders' appetite for bonds may have been lacklustre in the secondary market after picking up the fresh supply, dealers said.

The 10-year benchmark 7.10%, 2034 bond closed at 101.67 rupees, or 6.86% yield, against 101.72 rupees, or 6.85% yield, the previous day. On Thursday, the benchmark yield ended at its lowest level since Mar 31, 2022.

"There has been no buying (strong demand) in the market over the past hour," a dealer at a private bank said. "I think somebody is position-cutting because he doesn't want to go so heavy into the event, and is not finding the enthusiasm he was expecting."

Foreign banks were the likely sellers towards the close of trade, as their portfolios of India's gilts were very large heading into the event, dealers said. Clearing Corp of India up to Thursday showed that foreign banks have bought nearly 300 bln rupees worth of gilts in the secondary market. Domestic investors were not keen to buy the 10-year bond below 6.85% yield as they did not expect a sharp fall in bond yields below that level in the near-term, dealers said.

The market was sanguine heading into the speech, on the view that the Fed Chair would acknowledge softening inflation and labour market data and be the latest policymaker to signal the US Federal Open Market Committee would cut rates in September. However, traders were not convinced that Powell would signal a deeper 50-basis-point rate cut, though several traders hoped that he would not rule it out, dealers said. Signals of a deep rate cut may be taken as a signal of panic by the US central bank after the US unemployment rate rose to a near-three-year high in July, something that Powell is likely to avoid, they said.

The CME FedWatch tool showed Fed fund futures factoring in only a 28.5% possibility of a 50-bps rate cut. The remainder have fully priced in a 25-bps rate cut.

A rise in US Treasury yields in the second half of the day, ahead of Powell's speech, also weighed on domestic bond prices. The yield on the 10-year US Treasury note rose to a high of 3.86% intraday, against 3.83% at the end of Indian market hours on Thursday. 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.

The result of the weekly gilt auction was on expected lines. The government sold the 7.04%, 2039 bond worth 120 bln rupees and the 7.34%, 2064 gilt worth 110 bln rupees at the auction today. Insurers and pension funds picked up the long-term bond to lock in current yield levels, dealers said. Some of the supply was also picked up due to bond forward-rate agreements from private life insurers, and Separate Trading of Registered Interest and Principal Securities, or 'STRIPS', they said.

Demand for long-term bonds has been robust through the week, as mutual funds have sought bonds maturing above 15 years to increase their capital returns when interest rates fall, dealers said. Traders and insurers have also bought gilts maturing in 30-50 years anticipating the entry of Life Insurance Corp of India into the bond forward-rate agreement market, which will boost demand for such securities.

However, some investors held onto cash at the auction in order to pick up state bonds at auction next week, dealers said. According to the indicative calendar for Jul-Sep, states will borrow 294 bln rupees through bonds on Tuesday, among the largest state bond auctions in the current financial year that began April. After market hours, the RBI said 14 states will sell bonds worth 362.50 bln rupees.

While bonds maturing in over 10 years have risen this week, short-term bond prices have stagnated. This comes amid tightening liquidity and an uncertain rate-cut view in the country. Rate cuts in India are not seen until December, a view underlined by the minutes of the Monetary Policy Committee's Aug 6-8 meeting released on Thursday, dealers said. On Wednesday, liquidity in the banking system fell to a four-week low of 798.19 bln rupees amid outflows for goods and services tax payments.

Overnight rates are not expected to fall in the near-term, but traders still picked up the 2029 bond at auction as bond-swap trades were lucrative, dealers said. Traders bought the bond at auction at a spread of over 70 basis points over the five-year swap contract, and paid fixed rates in swap rates. In the five-year bond, private banks likely picked up a large chunk for their asset and liability management, followed by state-owned banks, dealers said. Banks have to maintain larger buffers of liquid assets such as government securities due to a proposed tightening of the liquidity coverage ratio guidelines.

"It was the kind of auction that is satisfying for most people," a dealer at a primary dealership said. "You have a limited need, you meet that need at the auction, don't need to go to the secondary or fight for the bond – it just went very smoothly."

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the turnover today was 358.35 bln rupees, sharply lower than 644.25 bln rupees on Thursday. There were no trades settled using the wholesale digital rupee pilot today, the same as the previous day.

OUTLOOK

Government bonds are not traded on Saturday. On Monday, gilt prices may take cues from US Fed Chair Powell's speech at the Jackson Hole Economic Symposium, scheduled at 1930 IST.

Prices of long-term gilts may fall slightly due to a higher-than-expected supply of state government securities next week, dealers said. An RBI release after market hours showed 14 states would raise 362.50 bln rupees through bonds on Tuesday, against 294.00 bln rupees scheduled in the indicative calendar for Jul-Sep.

Foreign fund inflows are likely to continue due to India's inclusion in JP Morgan's Emerging Market Index Suite, a 10-month process that started on Jun 28. Any uptick in yields may also prompt purchases by domestic banks, which will have to maintain larger buffers of liquid assets such as government securities due to an impending tightening of the liquidity coverage ratio guidelines.

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 6.82-6.90% during the day.

India Gilts: In thin band post auction result; mkt eyes Powell speech

MUMBAI--1530 IST--Prices of most government bonds continued to move in a thin band after the result of the weekly gilt auction was in line with expectations. Traders said bond prices would not move sharply ahead of Federal Reserve Chair Jerome Powell's speech due after market hours today.

Gilt prices inched lower in the secondary market due to a rise in US Treasury yields heading into the event, dealers said. The yield on the 10-year benchmark US Treasury note rose to 3.86%, from 3.83% at the end of Indian market hours on Thursday.

The government sold 120 bln rupees of the 7.04%, 2029 bond and 110 bln rupees of the 7.34%, 2064 bond. Insurers and pension funds picked up the long-term bond to lock in current yield levels, dealers said. Some of the supply was also picked up due to bond forward-rate agreements from private life insurers, and Separate Trading of Registered Interest and Principal Securities, or 'STRIPS', they said.

In the five-year bond, private banks likely picked up a large chunk for their asset and liability management, followed by state-owned banks, dealers said. Traders also said the spread between the 7.04%, 2029 bond over the 5-year overnight indexed swap rate, at around 70 basis points, was lucrative to pick up the bond while paying fixed rates on the swap, they said.

Traders also look forward to Fed Chair Powell's speech at the Jackson Hole symposium at 1930 IST. Investors hope that Powell will signal that the softening data on inflation and unemployment in the US was enough to justify an interest rate cut next month, dealers said. While a 25 bps rate has been fully factored in, the CME FedWatch tool showed Fed fund futures factoring a 24.5% possibility of a 50 bps rate cut. 

"I think Powell might keep the option of 50 basis points rate cut open with the... (US) PMI (Purchasing Managers' Index) data," a trader at a primary dealership said. The S&P Global US Flash Manufacturing PMI fell to 48.0 in August from 49.6 in July, marking an eight-month low. While services PMI rose from the previous month, the composite PMI was 54.1 in August, down slightly from 54.3 in July.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 261.45 bln rupees, against 523.25 bln rupees at 1530 IST on Thursday. Yield on the 10-year benchmark 7.10% 2034 bond is seen at 6.83-87% for the rest of the day. (Cassandra Carvalho and Srijita Bose)

India Gilts: Remain in thin band; auction seen sailing through

NEW DELHI--1140 IST--Government bond prices remained in a thin band as traders awaited the result of the 230-bln-rupee weekly gilt auction. The auction is likely to sail through, with investors keen on stocking up on both bonds at the auction, but traders' bids may not be aggressive after the rise in prices this week, dealers said.

The government offered to sell 120 bln rupees of the 7.04%, 2029 bond and 110 bln rupees of the 7.34%, 2064 bond at 1030-1130 IST. Domestic and foreign banks would all vie for the short-term bond, while demand from insurers, pension funds and mutual funds was expected for the 40-year gilt, dealers said.

"Our balance sheet guys have asked us to place a few bids," a dealer at a private bank said. "Right now, the paper doesn't make sense for HFT (held-for-trading portfolio) but people don't mind it in the balance sheet."

While bonds maturing in over 10 years have risen this week, short-term bond prices have stagnated. This comes amid tightening liquidity and an uncertain rate-cut view in the country. Rate cuts in India are not seen until December, a view underlined by the minutes of the Monetary Policy Committee's Aug 6-8 meeting released on Thursday, dealers said. On Wednesday, liquidity in the banking system fell to a four-week low of 798.19 bln rupees amid outflows for goods and services tax payments. Overnight rates are not expected to fall in the near-term, which is why bids for the five-year bond may not be aggressive at the auction, dealers said.

A chunk of the 2064 bond may be picked up by primary dealers for 'STRIPS', or Separate Trading of Registered Interest and Principal Securities, to sell to different sections of the market, dealers said. The imminent entrance of Life Insurance Corp of India to the forward-rate agreement market, speculated in September, has also been spurring buys from traders and investors.

"'STRIPS' has become a lucrative business for us over the last few months, and today, also there is a decent amount of demand," a dealer at a primary dealership said. "There is not a lot of volume, but the 40-year bond should not be too far from the traded price (in the secondary market)."

At the same time, investors were not too aggressive with their bids for the long-term bond as they wanted to preserve some cash for the state-bond auction next week, dealers said. States are scheduled to borrow 294 bln rupees via bonds on Tuesday, and state bonds offer higher returns to investors.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 52.35 bln rupees, against 229.70 bln rupees at 1130 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.83-6.88%. (Aaryan Khanna)

India Gilts: Little changed on caution before 230-bln-rupee bond sale

MUMBAI--1029 IST—-Prices of government bonds were steady as traders were cautious ahead of the 230-bln-rupee gilt auction due at 1030-1130 IST, dealers said. The market awaits comments from Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium after market hours. 

At the auction, the government will sell the 7.04%, 2029 bond worth 120 bln rupees and 7.34%, 2064 gilt worth 110 bln rupees. The auction is expected to sail through, though the recent rise in prices may prevent aggressive bids from investors, dealers said. 

"The market is a bit cautious today, we have gilts auction and then Powell's speech is also there," a dealer at a private bank said. "We are expecting moderate demand at the auction as both the papers up for auction have different segments for them."

The 7.04%, 2029 bond is expected to see demand from state-owned banks and private banks for their asset liability management purposes, dealers said. Domestic banks also have to maintain larger buffers of liquid assets such as government securities due to a proposed tightening of the liquidity coverage ratio guidelines by the Reserve Bank of India. Primary dealerships will also cover the short bets that they have been placing for two days, dealers said. Typically, primary dealerships place short bets ahead of the weekly gilt auction with the intention of covering them at a lower price at the auction.

"The auction is expected to sail through, we are seeing demand in the shorter end from state-owned banks and PDs (primary dealerships)," a dealer at a private bank said. "Not too sure if private banks will be aggressive. In the longer end, insurance will be there."

Mutual funds may also pick these bonds as they look to lock in higher capital gains, while insurance companies and pension funds would also pick up the 40-year bond, dealers said. Some traders said that insurers may be more keen to pick up state bonds next week, and may not bid aggressively for government securities. According to the indicative calendar for Jul-Sep, states will borrow 294 bln rupees through bonds on Tuesday, among the largest state bond auctions in the current financial year that began April.

The auction result could be the sole domestic trigger, and trade in the second half of the day may be lacklustre before Powell's speech at 1930 IST. Foreign portfolio investors' purchases of India's gilts have not slowed down heading into the speech, which suggests investors do not expect the US Fed Chair to push back the rate cut timeline, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 52.35 bln rupees, against 123.75 bln rupees at 1030 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.83-6.87%. (Siddhi Chauhan)

India Gilts: Seen steady on caution ahead of 230-bln-rupee bond sale

MUMBAI – Prices of government bonds are seen opening steady on caution ahead of the 230-bln-rupee gilt auction scheduled to take place at 1030-1130 IST, dealers said.

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.83-6.87%, against 6.85% on Thursday. The 10-year gilt yield ended at its lowest level since Mar 31, 2022, on Thursday.

At the auction, the government will sell 120 bln rupees of the 7.04%, 2029 bond and 110 bln rupees of the 7.34%, 2064 gilt. The auction is expected to sail through with the 2029 bond being picked by state-owned banks and private banks for their asset liability management purposes, dealers said. Meanwhile, the longer-tenure bond is expected to see demand from insurance companies and pension funds, dealers said. 

Offshore cues are also unlikely to give direction at the open, dealers said. The yield on the 10-year US Treasury note was at 3.84% in Asian trade, largely unchanged from the level at the end of Indian market hours on Thursday. 

Traders will look forward to US Federal Reserve Chair Jerome Powell's speech at the Jackson Hole symposium, dealers said. His speech will give clarity on the path of rate cuts in the US. According to the CME FedWatch tool, currently, 73.5% of Fed fund futures traders are pricing in a chance of a 25-basis-point rate cut by the rate-setting panel at its September meeting, while 26.5% of them have priced in the chance of a 50-bps cut.

These expectations have been largely static despite the minutes of the previous Federal Open Market Committee's meeting showing panel members were open to cutting rates, and had discussed a rate cut in July. (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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