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Informist, Tuesday, Sep 3, 2024

 

By Aaryan Khanna

 

NEW DELHI – The current month holds one of the most significant events for bonds in over a year: the US Federal Open Market Committee's meeting at which the panel is almost certain to cut interest rates. The domestic market is already well-prepared for the event, and market participants believe the 10-year benchmark government bond yield is not likely to change much by the end of the month. 

 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.85% at the end of September, according to the median of estimates of 20 money managers, treasury heads, and economists polled by Informist. The yield on the 10-year benchmark bond fell 7 basis points in August to end at 6.86%.

 

Domestic bond yields have declined secularly over the last two months, building up to expectation of rate cuts, first in the US and then in India. This month, the US policy outcome is likely to be the only driver for gilt prices, and even then not all respondents were convinced it would create volatility in a market that has traded in a 6.84-6.89?nd on the 10-year gilt since Aug 2.

 

US Federal Reserve officials, including Chair Jerome Powell, have signalled it was time to bring down interest rates after holding them at nearly two-decade highs for over a year. This has led to a consistent pricing of at least a 25-bps rate cut by the US FOMC since the first week of August, giving enough time for domestic traders and foreign portfolio investors in India's gilts to build up their portfolios.

 

In September, the fall in domestic yields may be limited by the fact that hopes of a quicker rate cut cycle have faded. The July US non-farm payrolls data had stoked fears of a recession, and a sharp fall in US interest rates to support the economy. These fears have ebbed due to subsequent growth and inflation data in the US. Another crucial non-farm payrolls print, for August, is due this Friday, but the unemployment rate is not likely to rise from the near-three-year high in July, poll respondents said.

 

"With the rate cut happening in the US and demand-supply intact, we should move towards 6.80% by the end of this month," said Naveen Singh, head of trading at ICICI Securities Primary Dealership. "The rate cut though has been quite telegraphed, so I don't think that we should see a sharp fall in yields, or any major volatility in India."

 

Foreign portfolio investment into India's bonds under the fully accessible route hit a record high of 239.14 bln rupees in August. These figures are likely to be matched if the US cuts rates, while India's interest rates don't change, dealers said.

 

The CME FedWatch tool shows Fed funds futures traders pricing in a 31% chance of a 50-bps rate cut at the policy meeting outcome on Sep 18. Some respondents expect US yields to rise if the committee cuts rates by only a quarter-of-a-percentage point. The FOMC could also puncture hopes of rate cuts exceeding 75 bps this year, when Fed officials give out the summary of their economic projections.

 

If the FOMC does not cut rates at all--a hypothetical scenario that no one in the domestic market is considering--the 10-year gilt yield could jump to 6.95-7.00%, levels last seen in July. At that point, demand for bonds from domestic banks is likely to spike as they will have to maintain larger buffers of liquid assets such as government securities due to an impending tightening of the liquidity coverage ratio guidelines. This will ensure that the 10-year benchmark yield does not top 7%, poll respondents said. 

 

"The market is ready for the US to cut rates, and as long as it is by only 25 basis points, we could see the domestic yields move up rather than down," said Akhil Mittal, senior fund manager – fixed income, at Tata Asset Management Co. "There should be some buyer's fatigue in the market, and we could remain in this range by the end of the month." 

 

What could surprise the market the other way is if the Fed does cut rates by 50 bps, signalling its strong intent to support a flagging labour market. US rate-setters could also signal a consistently soft policy path ahead, which could pull down the 10-year gilt yield to 6.75%. Some respondents are optimistic that's exactly what Fed Chair Powell would do at the post-policy press conference. Traders hope this would also spur the India's Monetary Policy Committee into action.

 

Domestic traders have not been able to bet big on rate cuts in India as Reserve Bank of India Governor Shaktikanta Das and other central bank officials have consistently pushed back against rate cuts until headline inflation is durably in line with the RBI's 4% aim. Projections do not show inflation reaching this aim even by Apr-Jun of 2025. Policy uncertainty is likely to continue in India this month as the market awaits the announcement of three new external members to the Monetary Policy Committee with the current external members' terms ending before the next monetary policy review in October.

 

Respondents spoke of the FOMC outcome as the single biggest mover for the domestic bond market, to the exclusion of all other India data lined up this month. Banking system liquidity may remain in a comfortable surplus during the month, and the RBI is likely to continue with regular variable rate repo and reverse repo operations. India's inflation data for August, due Sep 12, is also not seen as an incremental trigger to either bring forward or push back domestic rate cuts, respondents said. 

 

Towards the end of the month, the borrowing calendar for Oct-Mar will be highly anticipated. While the market does not expect the composition of the government's issuance pattern to change too much, some traders anticipate a further borrowing cut that could pull down yields further, respondents said. In the Union Budget for 2024-25 (Apr-Mar), the government cut its gross borrowing aim to 14.01 trln rupees from 14.13 trln rupees in the Interim Budget.

 

Following are the estimates for yield levels/range in percentage for the 10-year benchmark bond at the end of September:

 

Institutions	Yield on the 10-year benchmark
Bandhan Bank	6.85-6.90%
Bank of Baroda	6.82
CSB Bank	6.75
DBS Bank India	6.92
DCB Bank	6.75-6.85%
HDFC Bank	6.80-6.90%
ICICI Bank	6.82-6.87%
ICBC Bank	6.85%
IDFC Bank	6.85%
ICICI Securities Primary Dealership	6.80-6.82%
IndiaFirst Life Insurance	6.75-6.80%
Kotak Life Insurance	6.85-6.90%
Karur Vysya Bank	6.86-6.88%
PGIM India MF	6.75-6.95%
PNB Gilts	6.80%
Quantum Mutual Fund	6.85-6.95%
STCI Primary Dealer	6.80%
Sundaram Mutual Fund	6.80-6.90%
Tata Mutual Fund	6.80-6.90%
UCO Bank	6.60-6.62%

 

(With inputs from Cassandra Carvalho)

 

End

 

Edited by Tanima Banerjee

 

 

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