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Informist, Wednesday, Sep 4, 2024

By Srijita Bose

MUMBAI – Prices of government bonds ended higher after a fall in US Treasury yields due to hope of sharp rate cuts in the US, dealers said. Traders now await US job openings data today for further cues on the quantum of interest rate cuts heading into the crucial US Federal Open Market Committee meeting later this month.

The 10-year benchmark 7.10%, 2034 bond closed at 101.67 rupees, or 6.86% yield, against 101.58 rupees, or 6.87% yield, on Tuesday. Through the day, the 10-year bond traded in a range of only 4 paise, after opening higher.

Even as foreign investors bought gilts, the movement in domestic bond prices was limited as some state-owned banks booked profits at current price levels, dealers said. However, volumes rose as traders found a trigger to trade on after two days of lacklustre cues on the direction of trade.

The yield on the 10-year US Treasury note fell to 3.83% at the end of Indian market hours today from 3.92% on Tuesday, after US manufacturing Purchasing Managers' Index data came in lower than expected. The fall was also due to a broad sell-off in commodities, including crude oil. Brent crude for November delivery fell to as low as $72.63 a barrel today, levels last seen in December, from $75.85 a bbl at the end of Indian market hours on Tuesday.

China's PMI data was also lower than the market's estimates, and heightened fears of a global economic slowdown.

"The fall in US yields has come at the right time, I think people were losing a bit of faith (in the market)," a dealer at a state-owned bank said. "Because there has been nothing new, traders were not buying for the last few days – I think this and the other US data will give them some interest."

A fall in US yields widens the interest rate differential between haven assets and emerging market debt, making the latter more appealing to foreign investors.

Currently, the CME FedWatch tool shows that Fed fund futures are factoring in a 41% chance of a 50-basis-point rate cut at the outcome of the US FOMC's rate decision on Sep 18, the most in nearly a month. This was after the US S&P Manufacturing PMI printed at 47.9 in August, against a flash print of 48.0 and a final reading of 49.6 in July. The Institute of Supply Management's report on business manufacturing PMI printed at 47.2, against 47.9 expected in a Dow Jones poll. Reading of some sub-indices such as new orders was even poorer. A reading above 50 denotes expansion in activity, while a print below 50 indicates contraction.

During the day, domestic traders also looked ahead to the US Job Openings and Labor Turnover Survey, due at 1930 IST. Several other US data points are aldo due during the week, which will provide cues for the policy rate decision at the upcoming US FOMC meeting, including the crucial non-farm payrolls data for August on Friday. US Federal Reserve Chair Jerome Powell had signalled discomfort with further labour market weakness and suggested it was time to ease restrictive monetary policy.

Long-term bonds were the biggest gainers today, the same as on Tuesday. Trade volumes were concentrated in papers maturing in over 10 years due to heightened investor activity. Traders said that after the past week's slump in longer-tenure bonds, the market is picking up again as traders found the spread on the 30-year and 40-year papers over the 10-year bond lucrative. Long-term bonds had underperformed 10-year paper due to heavy supply of state bonds last week, which had drawn demand of long-term investors away from gilts, dealers said. 

The spread of the 7.34%, 2064 bond's yield over the 10-year 7.10%, 2034 bond's yield had risen to near 18 basis points earlier this week, and was 17 bps at close of trade on Friday. At the close of trade today, the spread had narrowed to a little over 15 bps, and is unlikely to narrow materially in the coming days, dealers said.

Some dealers speculated that Life Insurance Corp of India would enter the bond forward-rate agreement market as early as this week, after India's largest life insurer said it was preparing to conduct these derivative transactions. This could potentially bring forward a large chunk of additional demand for long-term securities, dealers said. Mutual funds were also adding long-term papers to their bond portfolios as chances of an aggressive rate cut cycle in the US have increased, dealers said. Long-term bonds offer the highest capital gains per basis-point fall in yields.

The 15-year 7.23%, 2039 paper also rose a little more than the 10-year bond, despite its presence at the weekly gilt auction on Friday. On Friday, the government will sell 60 bln rupees of the 7.02%, 2027 bond, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.34%, 2064 bond.

"Currently, there is a flattening trend in the market," a dealer at a primary dealer said. 

During the day, shorter-tenure gilts maturing in up to five years did not see a sharp reaction to the fall in US yields. These are usually the most sensitive to the near-term rate view. Dealers said that despite the imminent rate cuts in the US, they were not certain about whether India's Monetary Policy Committee would follow suit and change its stance at the upcoming policy review in October.

Reserve Bank of India Governor Shaktikanta Das has maintained that monetary policy must bring down CPI inflation so that it aligns with the central bank's 4% target on a durable basis. India's CPI print for July was at 3.5% on year due to a high base effect, the first inflation print below the RBI's aim since 2019. The central bank projects headline CPI inflation at 4.5% for 2024-25 (Apr-Mar), averaging higher than that through the second half of the financial year. 

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the turnover today was 406.05 bln rupees, higher than 313.90 bln rupees on Tuesday. Four trades worth 200 mln rupees were settled using the wholesale digital rupee pilot today, the same as the previous day.

OUTLOOK

On Thursday, gilt prices may take cues from mor US labour market data this week, dealers said. Data on US job openings for July was scheduled at 1930 IST today, followed by that on weekly jobless claims on Thursday and the cricial non-farm payrolls report on Friday.

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. During the day, primary dealers are likely to make room for the 290-bln-rupee weekly gilt auction on Friday. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.83-6.89% during the day.

India Gilts: Up; long-term bonds outperform as returns seen lucrative

India Gilts: Up; long-term bonds outperform as returns seen lucrative

MUMBAI--1340 IST--Prices of government bonds remained up after an overnight fall in US Treasury yields, dealers said. Long-term bonds were the biggest gainers as investors said current returns on bonds maturing in 30-50 years were lucrative.

"The current spread of long-term bonds over the 10-year had widened last week, which is why there has been consistent buying this week," a fund manager at a life insurer said. "The spreads should settle around these levels, at around 15 basis points between the 40-year bond over the 10-year." The spread of the 7.34%, 2064 bond's yield over the 10-year 7.10%, 2034 bond's yield had risen to near 18 basis points earlier this week, and was 17 bps at close of trade on Friday.

Some dealers speculated that Life Insurance Corp of India would enter the bond forward-rate agreement market as early as this week, after India's largest life insurer said it was preparing to conduct derivative transactions. This could potentially bring forward a large chunk of additional demand for long-term securities, dealers said.

The strong investor demand also pulled up the 15-year benchmark 7.23%, 2039 gilt more than the 10-year bond. Moreover, mutual funds were adding duration papers to their bond portfolios as the chances of an aggressive rate cut cycle in the US increased, dealers said. This was despite the supply of such bonds at the weekly gilt auction. The government will sell 60 bln rupees of the 7.02%, 2027 bond, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.34%, 2064 bond on Friday.

US Treasury yields fell due to a lower-than-expected PMI reading in August, as well as a broad fall in global commodity prices, dealers said. Of note for the Indian market, Brent crude for November delivery fell to $72.90 a bbl from $75.85 a bbl at the end of Indian market hours on Tuesday. The yield on the 10-year US Treasury note fell to 3.83% from 3.92% at the time the Indian market closed on Tuesday. Chances of a 50-bps rate cut at the US Federal Open Market Committee's upcoming meeting this month rose to 39%, while bets of a 25-bps fall moderated, according to the CME FedWatch tool.

Despite the imminent expectation of a US rate cut, gilts in India maturing up to five years did not have a sharp reaction. These are considered the most sensitive to the near-term rate view. However, traders were not yet sure whether the US cutting rates would translate to an easing of monetary policy in India in a hurry, with inflation seen above the Reserve Bank of India's 4% target, dealers said. 

"RBI keeps using liquidity management tools, so despite having high liquidity and seeing demand because of rate cut expectations, still no one wants short term," a dealer at a state-owned bank said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 264.30 bln rupees, against 136.60 bln rupees at 1330 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.85-6.89%. (Cassandra Carvalho and Aaryan Khanna)

India Gilts: Up tracking fall in US yields after weak US PMI data

MUMBAI--1030 IST--Prices of government bonds were up, tracking a fall in US Treasury yields after US Manufacturing Purchasing Managers' Index numbers for August were lower than expected, dealers said. The yield on the 10-year US Treasury note fell to 3.84% from 3.92% at the Indian market close on Tuesday.   

Lack of domestic cues leaves the market only with US yields offering direction, dealers said. US yields fell after August PMI data indicated signs of the world's largest economy heading into a recession. The US S&P Manufacturing PMI printed at 47.9 in August, against a flash print of 48.0 and a final reading of 49.6 in July. The Institute of Supply Management's report on business manufacturing PMI printed at 47.2, against 47.9 expected in a Dow Jones poll. A reading above 50 denotes expansion in activity, while a print below 50 indicates contraction.

Dealers now await US data such as weekly unemployment and retail sales numbers, due on Thursday for cues. "The US data due tomorrow (Thursday) and on Friday will set the groundwork for the Federal Open Market Committee meeting," a dealer at a state-owned bank said. US non-farm payrolls data will be released on Friday at 1800 IST. The US Federal Reserve will decide on interest rate cuts at its upcoming FOMC meeting on Sep 17-18. According to data from CME FedWatch tool, the chances of a sharp 50-basis-point cut in US rates in September have risen to 41% from 31% on Tuesday.

Most traders were keen to pick up bonds due to the impact of US yields. However, the impact of this may be short-lived as it could be offset by state-owned banks selling bonds at a profit as the yield on the 10-year benchmark 7.10%, 2034 bond nears 6.85%, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 126.25 bln rupees, against 32.35 bln rupees at 1030 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.85-6.89%. (Cassandra Carvalho)

India Gilts:Seen up on fall in US ylds post softer-than-view PMI data

MUMBAI – Prices of government bonds are seen opening higher, tracking an overnight fall in US Treasury yields after the US PMI showed signs of contraction in the US, dealers said. The rise in prices may be limited as some traders may sell their bonds at a profit, they added. 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.85-6.89%, against 6.87% on Tuesday.

Meanwhile, the yield on the 10-year US Treasury note fell to 3.84% from 3.92% at the Indian market close on Tuesday. A fall in US yields widens the interest rate differential between haven assets and emerging market debt, making the latter more appealing to foreign investors.

The yields fell Tuesday after the release of the US PMI data. The data renewed concerns among investors of a slowdown in the US economy. This has also increased the concerns of a larger rate-cut by the Federal Open Market Committee in its September meeting than what the market had factored in.

According to data from CME FedWatch tool, the chances of a sharp 50-basis-point cut in US rates in September has risen 41% from 38% a week ago. Fed funds futures continued to reflect at least a 25-bps rate cut at the next US FOMC meeting.

The US S&P Manufacturing PMI printed at 47.9 in August, against a flash print of 48.0 and a final reading of 49.6 in July. The Institute of Supply Management's report on business manufacturing PMI printed at 47.2, against 47.9 expected in a Dow Jones poll. A reading above 50 denotes expansion in activity, while a print below 50 indicates contraction.

On the domestic front, the gains may be capped as some state-owned banks may sell their bonds at a profit, dealers said. This, along with primary dealerships placing short bets ahead of the gilt auction on Friday may keep the prices from rising significantly. At the auction, the government will sell 60 bln rupees of the 7.02%, 2027 bond, 120 bln rupees of the 7.23%, 2039 gilt, and 110 bln rupees of 7.34%, 2064 bond. (Siddhi Chauhan)

End

Edited by Avishek Dutta

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