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Informist, Thursday, Sep 5, 2024

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended little changed due to caution ahead of Friday's weekly auction. Selling pressure from domestic banks and primary dealerships offset the impact of an overnight fall in US Treasury yields, and traders avoided aggressive bets ahead of two key sets of US labour market data this week.

The 10-year benchmark 7.10%, 2034 bond closed at 101.69 rupees, or 6.86% yield, against 101.67 rupees, or 6.86% yield, on Wednesday. Through the day, the 10-year bond traded in a range of less than 5 paise.

The government will sell 60 bln of 7.02%, 2027 gilt, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln of 7.34%, 2064 bond through an auction at 1030-1130 IST on Friday. Ahead of the auction, private banks and primary dealerships placed short bets. In addition, state-owned banks sold bonds aggressively through the day to make room for the debt sale, as well as to book profits on prior gilt purchases, dealers said.

"The demand for bonds on Thursday usually fizzles out, even if there are other international cues (such as a fall in US yields) because traders make space to pick up bonds at the next day's auction," a trader at a primary dealership said.

The price of the 7.34%, 2064 bond fell into negative towards the end of trade, after spending most of the day higher, as traders sold the bond. They expected to pick up the gilt at a discount at Friday's auction, dealers said. Demand for the bond from life insurers and pension funds is expected to be robust, but investors may demand higher returns as long-term gilt yields have fallen more than other tenures over the past two days, they said.

The market opened higher today, tracking an overnight fall in US Treasury yields. However, traders avoided placing large bets ahead of data on US private jobs after market hours today, and US non-farm payrolls on Friday, dealers said. These two data points will be crucial in hinting at whether the US Federal Open Market Committee will cut rates by 25 or 50 basis points at its meeting on Sep 17-18. Foreign portfolio investors are likely to have bought India's gilts through foreign banks today, dealers said.

The only cue to convincingly pull down the 10-year benchmark yield below 6.85% is if the Reserve Bank of India's Monetary Policy Committee softens its policy stance from the current 'withdrawal of accomodation', or central bank officials show signs of an interest cut this calendar year, dealers said. Without any sign of softening in domestic rates, gilt prices may continue to take few cues from the situation in the US, unless rate cuts are more aggressive than anticipated.

Data released last week by the statistics ministry showed India's GDP grew 6.7% in Apr-Jun, against the RBI's own view of 7.1%. While some traders had hoped a weaker-than-expected Apr-Jun GDP growth print could prompt thoughts of a rate cut, RBI Governor Shaktikanta Das' comments today dashed those hopes, dealers said.

Speaking at the FIBAC 2024 conference today, Das said it was necessary to "cut out the noise" about India's growth story. He attributed the slowdown in Apr-Jun to lower government spending, and said that more than 90% of the GDP components grew at a rate of over 7% in the June quarter. The central bank's GDP growth forecast of 7.2% for 2024-25 (Apr-Jun) was not out of place despite the first quarter print, the RBI governor said. With these comments, the impact of US data on the Indian bond market was brushed off, dealers said. 

A streak of softer-than-expected data on labour and output from the US has raised expectations that the Federal Open Market Committee would cut rates by a larger quantum than previously expected at its next policy meeting this month, dealers said. US government data released on Wednesday showed job openings in the country fell by 237,000 to 7.67 mln in July, the lowest level since January 2021. A Reuters poll of economists had projected job openings at 8.10 mln.

The yield on the 10-year US Treasury note fell to 3.77% at the end of Indian market hours from 3.82% on Wednesday. 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.

Odds of a 50-basis-point rate cut in the US rose to 41% at 1700 IST, up from around 30% earlier this week, according to the CME FedWatch tool. The remainder of the expectations are of a more moderate 25-bps rate cut.

Dealers said that foreign portfolio investors are likely to be purchasing India's government bonds maturing in seven years as they've already priced in a rate cut of at least 25 basis points by the FOMC. Nomura has been consistently recommending going long on India's seven-year gilt over the last few months to maximise the gains from potential rate cuts. The 7.02%, 2031 bond yield is only 3 bps lower than that on the 10-year benchmark gilt, while maturing three years earlier. 

"The seven-year bond (on the) yield curve looks attractive, especially if markets are expecting an interest rate cut in the US", a trader at a primary dealership said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the turnover today was 359.45 bln rupees, against 406.05 bln rupees on Wednesday. No trades were settled using the wholesale digital rupee pilot today, against four trades worth 200 mln the previous day.

OUTLOOK

On Friday, gilt prices may open steady ahead of the 290-bln-rupee weekly gilt auction, dealers said. Demand at the auction is expected to be robust. Foreign banks, along with state-owned banks, are expected to pick up the three-year bond. Mutual funds, pension funds and life insurers may pick up the 15-year and 40-year bond at the auction, dealers said.

Traders may be cautious ahead of US non-farm payrolls data for August, seen as a key trigger on the US FOMC's rate decision later this month. A string of weak jobs data recently has raised expectations of a 50-bps rate cut in the US later this month.

After market hours today, US ADP data showed the number of private jobs rose by 99,000 in August, below expectations of 145,000 private jobs. However, initial jobless claims in the US for the week ended Saturday were 227,000, lower than the previous week and below the market consensus. With the mixed data, fresh bets on rate cuts are unlikely until August's non-farm payroll data is out, 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. 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: Remain up; gains capped as traders await further cues

MUMBAI--1330 IST-–Government bond prices remained slightly higher due to a fall in US Treasury yields after US job openings fell more than expected, another data point signalling the US Federal Open Market Committee could opt for more aggressive rate cuts. Dealers said gains were capped as traders avoided further bets before more US data after market hours, and the weekly gilt auction on Friday, keeping prices in a thin band.

"It's a game of tug-of-war right now," a dealer at a state-owned bank said. "Also, we don't really have any further cues other than the US data."

Foreign banks were seen on the buying side as they sought to fulfil demand from foreign portfolio investor clients. State-owned banks were likely on the selling side, trimming their holdings at a profit, dealers said. Private banks and primary dealers were also placing short bets ahead of the weekly gilt auction on Friday, capping gains. The government has offered to sell 290 bln rupees at the auction this week.

Despite its fresh supply coming up, the 7.23%, 2039 bond rose slightly more than the 10-year benchmark gilt. Traders were of the view that demand at the auction for the bond would be robust, and scrambled to pick up the gilt this week in the secondary market, dealers said. Mutual funds and life insurers are likely to bid aggressively for the gilt, they said. Some banks said they consider even a 5-basis-point spread of the 15-year yield over the 10-year yield lucrative.

The 10-year US Treasury yield fell to 3.77%, down 1.1 bps from Wednesday's close, after US job openings data. Traders also look forward to the ADP private jobs data followed by the key non-farm payroll data for August. The CME Fedwatch tool showed that Fed fund futures are now factoring in a 41% chance of a 50 bps rate at the next FOMC rate decision on Sep 18, climbing steadily this week, while the remaining still factor only a 25-bps rate cut. 

"With the poorer data points coming in, US recessionary fears are back," a trader at a primary dealership said. "If the yields on 10-year benchmark US Treasury note fall below 3.74% levels, then the 10-year benchmark could fall again below 6.85%, but I don't see it sustain there for long."

The transmission of offshore rate cues to domestic gilt prices has been sluggish as traders fear a disconnect between the US and India's monetary policy actions, dealers said. India's GDP growth has remained resilient, and CPI inflation has not been consistently at the Reserve Bank of India's 4% aim.

RBI Governor Shaktikanta Das has pushed away expectations of a rate cut, and even today said the central bank's GDP growth forecast for 2024-25 (Apr-Jun) of 7.2% was not out of place despite a lower-than-expected Apr-Jun GDP print. Data released last week by the statistics ministry showed India's GDP grew by 6.7% in Apr-Jun as against the RBI's own view of 7.1%. However, Das brushed off any concerns, saying more than 90% of the GDP components grew at a rate of over 7% in Apr-Jun.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 209.80 bln rupees, against 136.60 bln rupees at 1330 IST on Wednesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.84-6.88%. (Srijita Bose and Aaryan Khanna)

India Gilts: Tad up tracking US ylds' fall; profit booking caps gains

MUMBAI--1021 IST--Prices of government bonds were a tad up, tracking an overnight fall in US Treasury yields after softer-than-expected data indicated signs of weakness in the world's largest economy, dealers said. However, state-owned banks selling their bonds at a profit limited the impact of a fall in US yields, dealers said. 

"Look at the yield levels, we did break (fell below) 6.85% for a moment because of a fall in US yields, but then that did not sustain," a dealer at a state-owned bank said. "This indicates that we are seeing heavy profit booking from state-owned banks."

In addition to state-owned banks, some dealers speculated private banks were also selling gilts picked up over the past two days. Foreign banks were likely still on the buying side, both on their proprietary books and due to demand from offshore investors, dealers said. 

The yield on the 10-year US Treasury note fell to 3.77% from 3.82% at the Indian market close on Tuesday. Yields fell after job openings in the US fell to a three-and-a-half year low in July, another data point that pointed to a slowing economy and aided traders' hopes of more aggressive rate cuts. The odds of a 50-basis-point rate cut by the Federal Open Market Committee at its meeting this month increased to 45% from 38% seen on Tuesday, according to the CME FedWatch tool, with the remainder expecting a 25-bps rate cut.

While the domestic 10-year benchmark paper failed to see a significant rise, the 15-year benchmark 7.23%, 2039 bond was up more as traders covered their short bets that they had placed ahead of the weekly gilt auction, dealers said. 

At the auction on Friday, the government will sell the 7.02%, 2027 bond worth 60 bln rupees, 7.23%, 2039 bond worth 120 bln rupees, and 7.34%, 2064 bond worth 110 bln rupees.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 111.55 bln rupees, against 126.25 bln rupees at 0930 IST on Wednesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.84-6.88%. (Siddhi Chauhan)

India Gilts: Seen up on fall in US ylds on weak US jobs opening data

MUMBAI – Prices of government bonds are seen opening higher, tracking an overnight fall in US Treasury yields after the US labour market showed a sustained sign of weakness, 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 6.84-6.88%, against 6.86% on Wednesday.

The yield on the 10-year US Treasury note fell to 3.76% from 3.82% 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.

US yields fell as investors assessed jobs openings data, which fell to a three and a half year low in July. US job openings fell by 237,000 to 7.67 mln in July, the lowest level since January 2021, according to the Bureau of Labor Statistics in its Job Openings and Labor Turnover Survey on Wednesday. A Reuters poll of economists had projected job openings to be 8.10 mln. 

The June reading was also revised lower. While a fall in US job openings by itself may not be a warning sign for the labour market and economy, the low nonfarm payrolls number for July suggested that job openings were falling even as workers were not actively filling those posts, dealers said.

On Wednesday, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said the Federal Reserve should not maintain high interest rates for an extended period as it could negatively impact employment. A streak of softer-than-expected data has raised the expectations that the Fed would need to cut rates by a larger quantum at its September policy meeting.

After the jobs data, the odds of a 50-basis-point rate cut by the US Federal Open Market Committee at its meeting this month increased to 45% from 38% seen on Tuesday, according to the CME FedWatch tool. Odds of a 25-bps rate cut at the two-day meeting, starting Sep 17, were at 55%, as of today. 

On the domestic front, the gains may remain limited as state-owned banks may sell their bonds at a profit, dealers said. However, the yield on the 7.10%, 2034 bond may fall down below the crucial mark of 6.85% today as private banks may step up purchasing bonds, dealers said. As per data from Clearing Corp of India, private banks have been on the buying side for two consecutive trading sessions. (Siddhi Chauhan)

End

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

Edited by Avishek Dutta

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