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Informist, Friday, Sep 6, 2024

By Aaryan Khanna and Cassandra Carvalho

MUMBAI – Prices of government bonds ended steady due to caution ahead of the US non-farm payrolls report for August, which was released after market hours today, dealers said. The price movement was limited as the 290-bln-rupee weekly gilt auction also failed to surprise traders, with cut-off prices broadly in line with expectations.

The 10-year benchmark 7.10%, 2034 bond closed at 101.70 rupees, or 6.85% yield, against 101.69 rupees, or 6.86% yield, on Thursday. Through the day, the 10-year bond traded in a range of 7 paise.

Dealers said that traders placed aggressive bets at the auction to remain well-stocked ahead of the US non-farm payrolls data released today at 1800 IST. Some traders were betting on the monthly data to underscore the weakness in the US labour market, prompting the Federal Open Market Committee to cut interest rates by 50 basis points at its upcoming policy review on Sep 17-18, dealers said. Currently, the CME Fedwatch tool said Fed funds futures show 47% chances of a 50-bps rate cut, up from around 30% earlier this week.

After market hours today, US non-farm payrolls rose 142,000 in August, against 161,000 expected in a Dow Jones poll. The unemployment rate subsided to 4.2%, in line with expectations, and below July's 4.3% reading, which was the highest in nearly three years. US data was the only and prime focus for the domestic government bond markets as traders are hoping that quicker US rate cut would also lead to the Reserve Bank of India's Monetary Policy Committee cutting rates in a hurry, dealers said.

"The non-farm payrolls are the last real trigger before the FOMC meet," a dealer at a private bank said. "If this can't move prices, then I guess the market must be patient for a miracle RBI (Reserve Bank of India) turnaround on domestic commentary before we break this range."

Meanwhile, at the auction, the government sold 60 bln rupees of the 7.02%, 2027 gilt, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.34%, 2064 gilt. The short-term bond's cut-off price slightly beat expectations, likely due to purchases by mutual funds, as well as banks for their asset liability management, dealers said. The bond was nearly cornered at the auction and had a bid-to-cover ratio of over six times. A ratio of around three typically showcases healthy demand. The RBI accepted only 13 out of 121 competitive bids for the paper.

In the secondary market, the 6.97%, 2026 bond saw volumes worth 25.00 bln rupees, while the 7.06%, 2028 bond saw volumes worth 19.00 bln rupees, becoming the third- and fourth-most traded papers today. Foreign portfolio investors were likely buying gilts through foreign banks, expecting to be on the cusp of a sharp rate cut cycle in the US that has been largely priced in US Treasury yields but not in India's bonds.

Today, the spread of the 10-year benchmark gilt yield rose to 315 bps over the 10-year benchmark yield, levels not seen since Feb 1. This week, the spread has widened 20 bps. 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 yield on the 10-year US Treasury note fell to 3.70%, from 3.77% at the Indian market close on Thursday.

While the other two bonds sailed through, the cut-off price of the 40-year bond was slightly below expectations. This was likely because a state-owned life insurer did not bid as well as the market had hoped, dealers said. Pension funds and private life insurers were keen to pick up the bond, but only while locking in higher returns. The 40-year bond's spread over the 10-year gilt, at around 15 bps before the auction, was also not very lucrative, some dealers said.

"This is feedback from the gilts market that the price sensitivity of long-term bonds is not appealing in these circumstances, so all that inflow is directed towards the 15-year paper", a dealer at a state-owned bank said. 

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the turnover today was 445.05 bln rupees, against 353.65 bln rupees on Thursday. Six trades worth 300 mln rupees were settled using the wholesale digital rupee pilot today, while no trades were settled via this method the previous day.

OUTLOOK

Government bonds are not traded on Saturday, and money markets are shut for Ganesh Chathurthi. On Monday, gilt prices may open higher after the weaker-than-expected US non-farm payrolls data for August, dealers said. However, some traders felt the data was mixed as average hourly earnings rose 0.4% in August, double the expected pace.

The initial reaction to the data has still kept odds of a 50-bps rate cut in the US below 50%, according to the CME FedWatch tool at 1930 IST. Globally, investors will gauge comments from two members of the US Federal Open Market Committee later today for takeaways from the crucial jobs report. Following this, US policymakers will enter a blackout period before the Sep 17-18 monetary policy review.

If expectations of a 50-bps rate cut do cement themselves, it may lead the yield on the benchmark 10-year 7.10%, 2034 to fall to fresh 29-month lows below 6.84%, dealers said. The fall may be limited due to a lack of domestic rate cues, particularly those on rate cuts, 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. There is also firm demand expected from 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 auction result; US jobs data eyed

MUMBAI--1615 IST-–Government bond prices were in a thin band after the results of the weekly gilt auction were broadly along expected lines, dealers said. Traders remained cautious and refrained from placing large bets ahead of key non-farm payrolls data from the US, due post market hours today.

"The demand was firm in the auction and now the market has gone back to the wait-and-watch more ahead of the US jobs data today," a dealer at a private bank said. 

The government sold 60 bln rupees of the 7.02%, 2027 gilt, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.34%, 2064 gilt. Both domestic and foreign banks picked up stock at the auction for their asset-liability management needs. The short-term paper also found interest from foreign portfolio investors, dealers said. The bond was nearly cornered at the auction and had a bid-to-cover ratio of over six times. A ratio of around three typically showcases healthy demand. The Reserve Bank of India accepted only 13 out of 121 competitive bids for the paper. 

After the bidding, the feedback on the 15-year bond was mixed. The auction sailed through due to interest from foreign banks, mutual funds and insurance companies, though bids were not aggressive and led to the 7.23%, 2039 bond's price falling below the cut-off in the secondary market, traders said. The result on the 7.34%, 2064 bond was the most disappointing amongst all three gilts, likely as a state-owned life insurer did not bid as well as the market had hoped, dealers said. Pension funds and private life insurers were keen to pick up the bond, but only while locking in higher returns. The 40-year bond's spread over the 10-year gilt, at around 15 bps before the auction, was not very lucrative, some dealers said.

Dealers said that foreign portfolio investors were now more keen on picking up the shorter-tenure bonds ahead of the non-farm payrolls data from the US. The continuous string of poor economic data from the US has driven up deeper rate cut expectations in the US and pulled down short-term bond yields. Currently, the CME Fedwatch tool said Fed funds futures show 43% chances of a 50-basis-point rate cut, up from around 30% earlier this week.

On the domestic front, traders are following the US economic data to gauge when the Reserve Bank of India could follow the US Federal Reserve and change its stance on an interest rate cut. Volumes in other shorter-tenure bonds picked up due to inflows from foreign investors, dealers said. Some investors were also keen to pick up short-term paper after it has been out of favour for the past several months, with domestic rate cuts hopes being delayed. The 6.97%, 2026 bond was the third-most traded bond in the secondary market.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 319.45 bln rupees, against 322.40 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: Up after firm demand at auction, fall in US yields

MUMBAI-–1245 IST--Prices of government bonds remained slightly higher after investors said the 290-bln-rupee weekly gilt auction is likely to sail through at cut-off prices near the secondary market levels. A fall in US Treasury yields continued to aid gilt prices, dealers said. 

The government offered to sell 60 bln rupees of the 7.02%, 2027 gilt, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.34%, 2064 bond at 1030-1130 IST. Traders said the three-year was firmly bid by state-owned and private banks at the auction. There was mixed feedback on the 15-year bond – while some dealers said the paper did not offer too much value to banks, others said it would be a good bet to hold on heading into the key US jobs data post market hours. Insurers and mutual funds were seen as the frontrunners for bids on the 2039 bond, dealers said.

The 40-year benchmark gilt was well-bid from pension funds and life insurance companies, the usual investors, including a state-owned life insurer, dealers said. Some investors may demand higher returns after the spread of the 40-year gilt over the 10-year benchmark narrowed this week by 1 basis point to 16 bps. Foreign portfolio investors are likely to be buying gilts today via foreign banks, especially at the auction, dealers said.

"The 40-year (7.34%, 2064) bond offers a good risk-reward ratio ahead of the US non-farm payrolls data for foreign investors," a dealer at a private bank said.

Traders await the US jobs data due at 1800 IST today as it may indicate the quantum of the interest rate cut expected from the Federal Open Market Committee at its upcoming policy review on Sep 17-18. Lower-than-forecast numbers would lead to higher expectations of a 50 basis point cut by the US Federal Reserve. Odds of a 50-bps rate cut in September hovered around 43%, according to the CME FedWatch tool. US yields were at 3.70%, from 3.77% at 1700 on Thursday, though traders await the non-farm payrolls data before taking any big bets on India's rate cuts, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 188.60 bln rupees, against 189.40 bln rupees at 1230 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.83-6.87%. (Cassandra Carvalho)

India Gilts: Tad up; mkt awaits 290-bln-rupee bond auction

MUMBAI--1023 IST--Prices of government bonds were a tad up due to a fall in US Treasury yields, dealers said. However, traders refrained from placing aggressive bets on caution ahead of the 290-bln-rupee gilt auction scheduled at 1030-1130 IST, dealers said. 

The government will sell 60 bln rupees of the 7.02%, 2027 gilt, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of the 7.34%, 2064 bond at the auction. The market expects firm demand at the auction today, with the 2027 bond seen being picked by private banks and state-owned banks for their asset liability management books, dealers said. Mutual funds are also seen bidding aggressively at the auction, dealers said. 

"The demand at the auction is seen firm, there is a build-up of short (bets), which will be covered today. The longer-end is expected to see good demand, it won't be shocking if the cut-off comes better than expected," a dealer at a state-owned bank said. "After the auction, traders will look forward to the release of the NFP data (US non-farm payroll data)."

The 2039 bond is expected to see demand from almost all segments of the market as it is the second most preferred bond after the 10-year benchmark paper, dealers said. State-owned banks and mutual funds are also expected to pick up this bond.

Primary dealerships, which placed short-bets ahead of the auction, will cover their short-bets. Typically, primary dealerships place short-bets ahead of a gilts auction, with the intention to cover these at the auction. 

The 2064 bond is expected to see demand from the usual long-term investors, pension funds, and life insurers, dealers said. Dealers expect that the presence of a large state-owned insurer company at the auction may result in good demand for the 2064 bond.

On the global front, the 10-year US Treasury yield fell to 3.73% from 3.77% at the end of Indian market hours Thursday after the US added private jobs in August at the slowest pace in three-and-a-half years. Traders now await the US non-farm payrolls data for August, due at 1800 IST.

Fed funds futures showed that the odds of a 50-basis-point rate cut at the Federal Open Market Committee's upcoming meeting were 41%, little changed from Thursday. The remainder expect a 25-bps rate cut, according to the CME FedWatch tool.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 39.90 bln rupees, against 119.55 bln rupees at 0930 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.83-6.87%. (Siddhi Chauhan)

India Gilts: Seen steady, cautious before 290-bln-rupee gilt auction

MUMBAI – Prices of government bonds are seen opening steady on caution ahead of the 290-bln-rupee gilt auction scheduled to take place at 1030-1130 IST, dealers said. However, a fall in US Treasury yields may take gilt prices slightly up, dealers said. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.83-6.87%, against 6.86% on Thursday. 

The government will sell 60 bln rupees of the 7.02%, 2027 gilt, 120 bln rupees of the 7.23%, 2039 bond, and 110 bln rupees of 7.34%, 2064 bond through an auction at 1030-1130 IST today.

The auction is expected to see firm demand, with state-owned banks and private banks expected to pick the 2027 bond for their asset-liability management books. The 15-year benchmark paper is also expected to see demand from state-owned banks. Primary dealerships may also cover their short bets that they have been placing before the auction, dealers said. The 2064 bond is expected to see demand from the usual long term investors, pension funds and life insurers, dealers said. 

During the day, the market may also take cues from the overnight fall in US Treasury yields. The yield on the 10-year US Treasury note fell to 3.73% from 3.77% at the Indian market close on Thursday. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors.

US Treasury yields fell on Thursday after data from the US showed the slowest increase in private hiring in August in three and a half years. It raised concerns around the health of the US labour market. US 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 consensus estimate. Due to the mixed data, traders will await August's non-farm payroll data due after market hours for better clarity on the path of rate cut trajectory in the world's largest economy, dealers said.

The odds of a 50-basis-point rate cut by the US Federal Open Market Committee at its meeting this month increased to 41% from 34% a week ago but are down from 43% Thursday, according to the CME FedWatch tool. Odds of a 25-bps rate cut at the two-day meeting, starting Sep 17, were at 59%. (Siddhi Chauhan)

End

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

Edited by Tanima Banerjee

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