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Informist, Friday, Aug 30, 2024

By Aaryan Khanna

NEW DELHI – Government bond prices ended steady ahead of key economic data in India and the US scheduled after market hours. Gilt prices ended off lows as the impact of an overnight rise in US Treasury yields was offset by firm demand for bonds at the 300-bln-rupee weekly gilt auction today.

The 10-year benchmark 7.10%, 2034 bond closed at 101.63 rupees, or 6.86% yield, flat from the previous day.

An Informist poll of 21 economists showed that India's GDP growth likely fell to a five-quarter low of 6.9% on restrained government spending in the June quarter due to the model code of conduct in effect during the General Election. Dealers estimated the GDP growth at 6.5-6.9%, against the RBI's forecast of 7.1%. RBI officials on the Monetary Policy Committee, including Governor Shaktikanta Das, have so far shied away from terming growth anything other than strong.

However, other traders were of the view that any slowdown in growth would allow them to begin placing bets on interest rate cuts in India. A less than 6.5% GDP growth estimate could pull down the full year's growth below 7%, from the RBI's 7.2% projection, dealers said. Such a reading may increase bets of a 75 basis point repo rate cut cycle over the next 12 months, against only 50 bps currently expected. In data released post market hours, Apr-Jun GDP growth was 6.7% on year.

"This is one of the first times in a long time when the GDP reading feels live," a dealer at a private bank said. "The RBI has been revising its growth projections only upwards, and now Apr-Jun growth will be lower than the downward revised number. So people are really looking at it as the next big rate trigger for rate cuts."

Traders said the US personal consumption expenditures data could also provide significant cues for a deeper interest rate cut at the upcoming US Federal Open Market Committee policy review. The CME Fedwatch tool showed that Fed fund futures are pricing in a 67.5% possibility of a 25-bps rate cut on Sep 18, with the remainder betting on a more aggressive 50-bps cut.

The rate cut hopes in the US have not diminished despite data showing higher than expected economic growth in Apr-Jun. In data released on Thursday, US GDP growth in the June quarter rose to 3.0%, against a provisional estimate and consensus expectation of 2.8%. The reading suggests the US is not close to a recession, which would necessitate sharp rate cuts by the US Federal Reserve. At the same time, the impact on Indian gilts was limited as it did not move the needle much on US rate cut expectations, with 50 bps rate cut hopes in September still remaining above 30%, dealers said.

The yield on the 10-year US Treasury note rose to 3.86% at the end of Indian market hours today from 3.83% 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 impact of the rise in US yields was limited and restricted to the first half of the day as focus shifted to the weekly bond auction, dealers said.

The government sold 200 bln rupees of the 7.10%, 2034 gilt and the 7.09%, 2054 bond. Demand for both bonds by domestic banks was robust at the auction, with cutoff prices on expected lines. Private and state-owned banks added the benchmark gilt to their portfolios, while traders covered their short bets at the auction. Foreign portfolio investors likely picked up the bond through foreign banks, dealers said. The benchmark gilt – issued only once every three weeks – attracted bond-index related flows today, dealers said. The weightage of India's gilts will increase to 3% on the JP Morgan's Government Bond Index – Emerging Market as August ends.

Corporate and state bond issuances this week had already topped 500 bln rupees, which was seen as a potential weakness in demand for the 2054 bond at auction. However, life insurers and pension funds, the usual investors, picked up most of the supply, dealers said. Around 30 bln rupees of the demand for the 2054 bond was for derivatives instruments, including bond forward-rate agreements and Separate Trading of Registered Interest and Principal Securities, or STRIPS.

Trade volume of the 7.06%, 2028 bond picked up during the day as foreign portfolio investors likely bought the bond, dealers said. India's weightage on the JP Morgan emerging market index will increase to 3% after today, which is also resulting in an inflow into shorter-tenure bonds. Private banks may have also picked up the bond to match their liabilities, dealers said.

Meanwhile, there was little reaction to Fitch Ratings' reaffirming India's sovereign credit rating at 'BBB-' with a stable outlook on Thursday. India's rating upgrade has been long overdue and may not reflect the macroeconomic strength of the economy, dealers said. Moreover, foreign investors were keen to invest in India due to those strengths, as well as during the inclusion of India's gilts to global bond indices operated by JP Morgan and Bloomberg. 

"There is still an expectation that the rating will be improved by the end of the financial year," a dealer at a state-owned bank said. "So for any foreign investors, getting into the Indian market, which is now on the index, is very compelling."

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the turnover today was 356.65 bln rupees, higher than 213.55 bln rupees on Thursday. There were no trades settled using the wholesale digital rupee pilot today for the seventh straight day.

OUTLOOK

Gilts are not traded on Saturday. On Monday, gilt prices may open higher after India's GDP growth was lower than expected, which may spur rate cut bets by the MPC starting December, dealers said.

RBI officials on the Monetary Policy Committee, including Governor Shaktikanta Das, have so far shied away from terming growth anything other than strong. However, India's GDP grew 6.7% in Apr-Jun, lower than the median estimate of 6.9% in an Informist poll, and well short of the RBI's own 7.1% forecast.

The US Fed's preferred inflation gauge--the core personal consumption expenditures price index--for July rose 0.2% on month, in line with market expectations, and did not have a sizeable impact on the US rate view, dealers said. 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.

As seen today, 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 6.83-6.89% during the day.

India Gilts: In thin band after gilt auction; India, US economic data eyed

MUMBAI--1630 IST--Prices of government bonds moved in a thin band after results of the weekly gilt auction were along expected lines, dealers said. Traders remained cautious and refrained from placing large bets ahead of key data prints on US inflation and India GDP due after market hours.

"The market was well-behaved, everyone got stock of the 10-year (7.10%, 2034) paper," a dealer at a primary dealership said.

The government sold 300 bln rupees worth of gilts, with cutoffs for both the 7.10%, 2034 bond and 7.09%, 2054 gilt on expected lines. Private and domestic banks added the benchmark gilt to their portfolios, while traders covered their short bets at the auction. Foreign portfolio investors likely picked up the bond through foreign banks, dealers said.

As for the 2054 bond, long-term investors demanded higher returns but had enough appetite for the auction to sail through, dealers said. Most participants sated their appetite at the auction and are waiting for any upcoming cues on interest rates in the US or India to trade on the secondary market. 

"The market being stable is a positive on a day when you had to absorb huge supply," a dealer at a state-owned bank said. 

The next significant trigger on the domestic rate view is the Apr-Jun GDP print scheduled at 1730 IST. An Informist poll showed that economists expected growth to moderate to 6.9% during the quarter. Dealers said a reading below 6.75% could accelerate rate-cut expectations. The Reserve Bank of India projects India's June quarter GDP growth at 7.1%.

Traders also said the US personal consumption expenditures data could provide significant cues for a deeper interest rate cut at the upcoming US Federal Open Market Committee policy review meeting. The CME Fedwatch tool showed that currently Fed fund futures are pricing in a 67.5% possibility of a 25-basis-point rate cut on Sep 18, with the remainder betting on a more aggressive 50-bps cut.

The trade volume on the 7.06%, 2028 bond picked up during the day as foreign portfolio investors likely bought the bond, dealers said. India's weightage on the JP Morgan emerging market index will increase to 3% after today, which is also resulting in an inflow into shorter-tenure bonds. Private banks may have also picked up the bond for their balance sheet management, they said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 257.85 bln rupees, against 132.45 bln rupees at 1530 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.85-6.89%.  (Srijita Bose)

India Gilts: In thin band; robust demand seen from domestic banks

NEW DELHI--1220 IST--Prices of government bonds traded in a thin band ahead of the result of the 300-bln-rupee weekly gilt auction. Expectations of robust demand helped prices recover from early lows, dealers said.

The government offered to sell 200 bln rupees of the 7.10%, 2034 bond and 100 bln rupees of the 7.09%, 2054 gilt during 1030-1130 IST. Domestic banks, both state-owned and private ones, will pick up the majority of the supply, dealers said. Additionally, traders will cover their short bets in the 10-year bond, which may lead to a cut-off price not much below current market levels. According to the Clearcorp Repo Order Matching System--a proxy for gauging short bets, as short sellers must borrow the bond overnight--the trades on the 10-year gilt were worth nearly 120 bln rupees.

"The appetite is definitely there," a dealer at a state-owned bank. "Not only from us... other PSU (state-owned) banks, private banks, are both heavily bidding for the 10-year paper."

Traders were unsure of whether foreign banks would also bid aggressively for the 10-year bond, though some speculated that they would pick up the benchmark gilt--issued only once every three weeks--to offer to clients. The weightage of India's gilts will increase to 3% on the JP Morgan's Government Bond Index – Emerging Market as August ends. Foreign portfolio investors have been keen to pick up the 7.10%, 2034 bond, though interest heard so far has been scant, a dealer at a foreign bank said.

Meanwhile, investors will mop up the supply of the 30-year bond, though they are likely to demand higher returns after stocking up on state and corporate bonds this week, dealers said. Around 30 bln rupees of the demand for the 2054 bond will be for derivative instruments, including bond forward-rate agreements and Separate Trading of Registered Interest and Principal Securities, or STRIPS. The remainder will be picked up by life insurers and pension funds, the usual investors, with mutual funds seen on the sidelines, dealers said. 

Focus shifted to the auction early in the day after the reaction to an overnight rise in US Treasury yields was underwhelming. Despite stronger-than-expected US GDP data, expectations of rate cuts in the US did not change significantly, limiting the impact on the domestic market, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 100.10 bln rupees, against 65.70 bln rupees at 1230 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.85-6.89%. (Aaryan Khanna)

India Gilts: Tad down; firm demand seen at auction limits losses

NEW DELHI--0940 IST--Government bond prices were a tad down due to a rise in US Treasury yields, but firm demand expected at the weekly gilt auction limited losses, dealers said. The government will sell 200 bln rupees of the 7.10%, 2034 bond and 100 bln rupees of the 7.09%, 2054 gilt at 1030-1130 IST.

"We had expected around an 8 paise fall at open, but the market has opened quite strong," a dealer at a state-owned bank said. "Nats (state-owned banks) will buy very aggressively today, they will not even allow a tail." The tail is the gap between average and lowest-accepted prices at a multiple-price auction.

State-owned banks have sold nearly 250 bln rupees worth of gilts in the secondary market in August, according to Clearing Corp of India data updated till Thursday. While state-owned banks have been buying spread instruments such as state bonds at auction, they have been trimming their gilt holdings at lucrative price levels, and are looking to buy the 10-year gilt, dealers said. Demand for the 30-year bond may be more lacklustre, as long-term investors have picked up a large supply of bonds maturing in over 10 years this week. Investors may also be fatigued after the over 500 bln rupees of state and corporate bond debt sales this week, dealers said.

Higher-than-expected US GDP growth in Apr-Jun eased fears of a recession in the world's largest economy, but also cooled aggressive rate cut bets, dealers said. The yield on the 10-year benchmark US Treasury note rose by 4 basis points from the end of Indian market hours Thursday to 3.87%.

Despite the rise in US yields, foreign inflows into Indian debt are likely to continue with US rate cuts, by at least 25 bps, seen imminent in September, dealers said. Moreover, India gilts' weight on JP Morgan's Government Bond Index – Emerging Market index rises to 3% after the August-end rebalancing due today. Foreign banks may also stock up on the 7.10%, 2034 bond to sell to offshore clients over the next few weeks, with this being the last auction of the 10-year benchmark bond before the US Federal Open Market Committee rate decision on Sep 18 and only one more auction of the bond to go in the Apr-Sep calendar, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 22.05 bln rupees, against 11.80 bln rupees at 0930 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.85-6.89%. (Aaryan Khanna)

India Gilts: Seen down on rise in US yields; gilt auction to lend cues

NEW DELHI – Prices of government bonds are seen opening lower due to an overnight rise in US Treasury yields after upbeat US growth data allayed fears of a recession in the world's largest economy, dealers said. Traders may avoid placing aggressive bets ahead of the 300-bln-rupee weekly gilt auction at 1030-1130 IST.

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.84-6.90%, against 6.86% on Thursday. On Thursday, prices ended steady due to a lack of cues ahead of key economic data released after market hours.

US GDP grew 3.0% in Apr-Jun, against a provisional government estimate and market expectation of 2.8%. Further, initial unemployment claims for the week ended Saturday were also in line with a Dow Jones estimate. The recessionary fears that had gripped the US market after the unemployment rate in July rose to a near-three-year high have faded after the recent data, dealers said. This is likely to prevent the US Federal Open Market Committee from cutting interest rates by 50 basis points at its upcoming meeting in September, they said.

Fed funds futures showed a trimming of 50-bps rate cut expectations to 33% from 38% a day ago, according to the CME FedWatch tool. The yield on the 10-year US Treasury note rose to 3.87% at 0823 IST from 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 expected weakness in the secondary market is not likely to carry forward to the auction, dealers said. The government will sell 200 bln rupees of the 7.10%, 2034 bond and 100 bln rupees of the 7.09%, 2054 gilt. Demand at the auction is seen robust for both papers. State-owned banks may prefer to pick up the 10-year bond if its yield tops 6.88%, which would be the highest in over two weeks. Demand from mutual funds and long-term investors for the 2054 bond will help the auction sail through, though bids may not be aggressive after the over 500 bln rupees of state and corporate debt supply this week, dealers said.

With no aggressive rate cuts in the US, the Reserve Bank of India's Monetary Policy Committee is likely to be in no hurry to bring down the policy repo rate from the current 6.50% either, dealers said. The market has lost momentum over the last few days as domestic rate cut expectations have been muddled, while US Treasury yields ticked up. A trigger for interest rate cuts may come from India's Apr-Jun GDP data release at 1730 IST.

An Informist poll of 21 economists showed that India's GDP growth fell to a five-quarter low of 6.9% on restrained government spending in the June quarter due to the model code of conduct in effect during the General Election. Dealers estimate the GDP growth print at around 6.5-6.9%, against the RBI's forecast of 7.1%. RBI officials on the Monetary Policy Committee, including Governor Shaktikanta Das, have so far shied away from terming growth anything other than strong. The US Fed's preferred inflation gauge--the core personal consumption expenditures price index--for July is also due after market hours. 

Meanwhile, there was little reaction to Fitch Ratings' reaffirming India's sovereign credit rating at 'BBB-' with a stable outlook on Thursday. India's rating upgrade has been long overdue and may not reflect the macroeconomic strength of the economy, dealers said. Moreover, foreign investors were keen to invest in India due to those strengths, as well as during the inclusion of India's gilts to global bond indices operated by JP Morgan and Bloomberg.  (Aaryan Khanna)

End

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

Edited by Ashish Shirke

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