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Informist, Wednesday, Sep 11, 2024

 

By Cassandra Carvalho

 

MUMBAI – Prices of government bonds ended higher after US Treasury yields slumped overnight, dealers said. Traders are waiting for US CPI inflation for August that will be detailed at 1800 IST for further cues on the quantum of an interest rate cut by the US Federal Open Market Committee at its upcoming policy review next week.

 

The 10-year benchmark 7.10%, 2034 bond closed at 101.89 rupees, or 6.83% yield, against 101.72 rupees, or 6.85% on Tuesday. The 10-year gilt yield ended at its lowest level since May 30, 2022, breaking out of a narrow trading range of 6.84-6.89% it had remained in since Aug 5.

 

Most of the rise in domestic bond prices was attributed to purchases by foreign banks and private banks, dealers said. The spread between the yields of the US benchmark and India's 10-year gilt widened to 321 basis points, the highest since Jan 12, making it lucrative for foreign portfolio investors to buy gilts, dealers said. Foreign portfolio investors were likely purchasing bonds through foreign banks, dealers said. 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.

 

The yield of the benchmark US Treasury note fell to 3.63% at 1700 IST, against 3.72% on Tuesday. Dealers said the fall in US yields was due to a combination of factors. Expectations of lower-than-forecast US CPI, along with a fall in crude oil prices, and the effect of the US presidential debate were a triple-whammy pulling US yields downward, with the 10-year US yield falling below the crucial 3.68% mark, dealers said.

 

This was the key to the early surge in Indian gilt prices, as US rate-cut expectations were not significantly different from Tuesday, dealers said. Heading into the inflation data, the CME Group's FedWatch Tool showed Fed fund futures priced in 71% chance of a 25 basis point cut in the policy rate, with the remainder factoring in a 50-bps cut. A Reuters poll estimated US CPI inflation for August at 2.6% on year, against 2.9% in July.

 

Data released after market hours showed US CPI inflation was slightly lower-than-expected at 2.5% on year in August. Sequentially, the CPI rose 0.2% last month, in line with expectations. However, traders betting on inflation moderating sharply were likely to be disappointed, dealers said.

 

"So far the US Federal Reserve has been paying more attention to labour data than inflation for determining rate cuts. If today's CPI data comes largely different from estimates, only then chances of a high rate cut can be expected," a dealer at a private bank said.

 

The growth forecast for crude oil demand in 2024 has been trimmed by nearly 100,000 barrels per day to 2.0 mln bpd this year, the Organization of the Petroleum Exporting Countries said in its September Oil Market Report on Tuesday. The cartel sees demand for crude oil in 2025 rising by 1.7 mln bpd, 40,000 bpd lower than the previous month's estimate. Following the report, Brent crude oil futures for November fell below $70 a bbl, the first time since 2021. This pulled down US yields and gave a boost to domestic gilt prices as fears of imported inflation eased, dealers said.

 

The US presidential debate held Tuesday has boosted Democratic Party's nominee Kamala Harris's chance of an electoral victory in November, dealers said. She is expected to be more fiscally prudent than her opponent, Republican challenger Donald Trump, helping with traders' outlook on long-term US Treasury notes. Strong demand at the auction of $58-bln worth of three-year US Treasury notes was also a contributing factor for the fall in US yields, dealers said.

 

Dealers said that since the yield on the 10-year benchmark gilt has fallen below 6.84% tracking just US yields, it could fall to 6.80% or below after a likely rate cut in the US next week. However, bond sales by state-owned banks will continuously limit gains at these levels, which have not been seen in over two years.

 

Demand for the 15-year 7.23%, 2039 bond was robust, with the yield falling to its lowest level of 6.88% since its issuance in April this year. According to data from the Clearing Corp of India, the bond saw 68.65 bln rupees worth of trades and was the second-most traded paper in the market. Private banks and mutual funds may have bought the long-term paper to maximise trading gains, dealers said. Prices of longer-term papers are more sensitive to a single basis point move in yields and with yields seen falling uniformly, traders preferred to add duration, they said.

 

"The market may be buying or selling, but no one is exiting their positions," a dealer at a state-owned bank said. "Market participants are just selling in one segment (such as long-term or short-term) and buying in another," the dealer said.

 

Contributing to the rise in gilt prices was the heavy receiving of fixed rates by offshore traders in the overnight indexed swaps market, which was higher than expected, dealers said. The five-year OIS rate ended at 5.97%, its lowest level since May 22, 2023. The one-year swap rate ended at 6.39%, a two-year low. Both contracts fell over 5 bps.

 

The market-wide turnover as of 1700 IST was 744.45 bln rupees, sharply higher than 326.15 bln rupees on Tuesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades under the wholesale digital rupee pilot.

 

OUTLOOK

On Thursday, gilt prices may open lower as traders are likely to unwind their bets from today as the US CPI inflation was marginally lower than expected but not enough to give the market certainty on the quantum of rate cuts in the US in 2024, dealers said.

 

At 1940 IST, the CME FedWatch tool showed that Fed fund futures reflected a 85% probability, against 66% a week ago, of a 25 bps interest rate cut next week. The expectation of a 50-bps rate cut has shrunk to 15%.

 

Traders await India CPI data due post-market hours on Thursday. Traders will take cues from the India print for a possibility of a change in monetary policy stance in India.

 

As anticipation for the FOMC rate cut cycle kicks in, any sharp movement in US Treasury yields may lend cues when the market opens, dealers said. Movement of crude oil prices may also affect gilt yields. US producer prices may lend incremental cues, but are not seen a key determinant of rate cut views. The data will be released after market hours Thursday.

 

Foreign fund inflows are likely to continue because of a widening interest rate differential between India and US bonds as well as the inclusion of Indian bonds in the JP Morgan Index, 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 guidelines on liquidity coverage ratio.

 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.80-6.88% during the day.

 

	TODAY		TUESDAY
	PRICE	YIELD	PRICE	YIELD
7.10%, 2034	101.8875	6.8271%	101.7200	6.8510%
7.18%, 2033	102.1800	6.8482%	101.9975	6.8757%
7.23%, 2039	103.1700	6.8813%	102.9200	6.9082%
7.04%, 2029	101.2700	6.7182%	101.1850	6.7395%
7.32%, 2030	102.6475	6.7849%	102.5300	6.8083%

 

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India Gilts: Remain up; long-term bonds back in favour ahead of FOMC

 

	1630 IST	PRICE HIGH	PRICE LOW	OPEN	PREVIOUS
07.10%, 2034
PRICE (rupees)	101.86	101.87	101.79	101.80	101.72
YTM (%)	6.8314	6.8296	6.8410	6.8396	6.8510

 

MUMBAI--1630 IST-–Government bond prices remained up as a fall in US treasury yields ahead of the US CPI print for August pulled yields on the 10-year benchmark 7.10%, 2034 paper to a 29-month low. Gilts maturing in over 10 years were up more as traders expected greater gains from those bonds against the 10-year gilt, dealers said. 

 

"Traders think that the yield on the 10-year benchmark will sustain around 6.83% levels till Sep 18, so they are buying duration papers now," said a dealer at a state-owned bank. The US Federal Open Market Committee's rate decision is due then.

 

Dealers said that since the yield on the 10-year benchmark has broken below 6.84%, traders are now of the view that it could drop below 6.80% after a possible rate cut in the US next week. Yield on the 15-year benchmark 7.23%, 2039 paper fell to 6.88%, its lowest since its issuance in April, and was relatively favoured versus the 10-year gilt today. Trade volumes were also higher in these segments. The 2039 gilt was the second-most traded paper so far.

 

Foreign banks likely bought bonds aggressively during the day, while state-owned banks sold at a profit, dealers said. Some primary dealerships and private banks were picking up both the 2034 gilt and longer-tenure bonds, they said. Currently, the CME Group's FedWatch Tool showed Fed fund futures priced in 71% chance of a 25 basis point cut in the policy rate, with the remainder factoring in a 50-bps cut.

 

Dealers said that the fall in US yields was a result of expectations of a lower CPI print in the US along with a fall in crude oil prices due to supply easing, which also led to a fall in domestic bond yields. The 10-year US Treasury yield was at 3.63%, 9 bps lower than the level at the end of Indian market hours on Tuesday. The US CPI release is hotly awaited as the next interest rate trigger, at 1800 IST, dealers said.

 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 635.95 bln rupees, against 286.60 bln rupees at 1630 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.82-6.86%.  (Srijita Bose)

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India Gilts: Remain up; sharp rate cuts seen if US CPI below view

 

	1330 IST	PRICE HIGH	PRICE LOW	OPEN	PREVIOUS
07.10%, 2034
PRICE (rupees)	101.86	101.87	101.79	101.80	101.72
YTM (%)	6.8310	6.8296	6.8410	6.8396	6.8510

 

 

MUMBAI--1330 IST--Prices of government bonds remained up after a fall in US Treasury yields, dealers said. US CPI data for August is scheduled for release at 1800 IST today. Dealers expect a lower-than-forecast CPI reading, which may prompt the US Federal Open Market Committee to cut rates sharply, dealers said. 

 

The yield on the 10-year US Treasury note fell to 3.62%, against 3.72% at 1700 IST on Tuesday. The spread between the US benchmark and India's 10-year gilt yield widened to 321 basis points, the highest since Jan 12, making it lucrative for foreign portfolio investors to buy gilts, dealers said. Foreign portfolio investors were likely buying through foreign banks, dealers said. 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.

 

"The fall in US yields caused our 10-year bond to finally break its 6.85% yield level, so now we are seeing increased foreign inflows", a dealer at a state-owned bank said.

 

At 1330 IST, the CME FedWatch tool showed that Fed fund futures reflected a 35% probability of a 50 bps rate cut by the Federal Open Market Committee at its upcoming policy review next week. Dealers expect that the US CPI data for August will be lower than Reuters forecast of 2.6%, leading to increasing expectation of a 50-basis-point rate cut in the US, or at least 100 bps of rate cuts in 2024, they said. Brent crude for November delivery slipped below $70 a bbl, further pushing down US yields as well as reducing fears of imported inflation in India, the world's third-largest oil importer.

 

A majority of the rise in bond prices was attributed to purchases by foreign banks and private banks, along with short covering from other traders, dealers said. Consequently, India's 10-year gilt yield remained at its lowest level since Mar 31, 2022. Some dealers expect bond prices to fall in the second half of trade on caution ahead of the release of the US inflation print, and the 10-year gilt yield to move closer to 6.85%. The caution will continue as traders await India Aug CPI data due post-market hours on Thursday, dealers said.

 

With rate cut expectations in focus, short-term bonds were more actively traded and saw demand from banks and mutual funds, dealers said. According to data from the Clearing Corp of India, the 7.04%, 2029 bond saw trades worth 17.05 bln rupees and the 7.06%, 2028 bond saw trades worth 15.25 rupees as of 1330 IST.

 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 478.60 bln rupees, against 190.30 bln rupees at 1330 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.82-6.86%. (Cassandra Carvalho)

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India Gilts: Up on fall in US ylds; 10-year gilt yield at 29-mo low

 

	1040 IST	PRICE HIGH	PRICE LOW	OPEN	PREVIOUS
7.10%, 2034
PRICE (rupees)	101.85	101.87	101.79	101.80	101.72
YTM (%)	6.8332	6.8303	6.8410	6.8396	6.8510

MUMBAI--1040 IST--Prices of government bonds were up on the back of an overnight fall in US Treasury yields, dealers said. Trade volumes surged as the yield on the 10-year benchmark gilt fell to its lowest in over 29 months.

 

At 6.83%, the benchmark yield fell to its lowest since Mar 31, 2022. The 10-year gilt yield has traded within a band of 6.84-6.89% since Aug 5, and traders have been on the sidelines due to the lack of volatility in prices. That monotonous trading pattern broke due to the sharp fall in US Treasury yields, with the yield on the 10-year US Treasury note falling to its lowest since June 2023.

 

"I think all that we needed was for the (US) yield to fall significantly. Now that this has happened, the crucial level of 6.84% (yield on 7.10%, 2034 bond) has been broken now, it seems that we are heading towards 6.80%," a dealer at a private bank said.

 

The yield on the 10-year US Treasury note fell to 3.62% from 3.72% at the time the Indian market closed on Tuesday. The yields fell ahead of the release of US CPI figures post market hours. The headline Consumer Price Index in the US is expected to rise 0.2% on month in August, unchanged from the previous month, as per a poll by Reuters. On a yearly basis, inflation is seen at 2.6% last month, down from 2.9% in July. 

 

The fall in US yields has led foreign banks to step up bond purchases, dealers said. 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.

 

As per data from Clearing Corp of India, foreign banks were the top net buyers on Tuesday. They did so as the spread between the US 10-year benchmark and the domestic benchmark was lucrative for them to buy, dealers said. They were also buying the bonds due to India's ongoing inclusion in JP Morgan's Government Bond Index – Emerging Market suite. Contributing to the surge in prices was the heavy receiving of fixed rates by offshore traders in the overnight indexed swaps market, particularly in the five-year swap, dealers said. The five-year OIS fell to 5.98%, its lowest level since Jun 2, 2023. 

With the 10-year gilt yield now having broken its range over the past month, traders are likely to step up purchases and lead to a surge in bond prices over the next few days, provided India and US CPI data doesn't surprise on the upside, dealers said. Private banks may be taking fresh bets on a fall in yields from here-on. Some traders were also trimming their bond holdings and booking profit ahead of the release of crucial inflation both in the US and in India, dealers said. Moreover, they said the rise in prices was unwarranted as the rate-cut expectations in the US and India had not changed. 

 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 239.10 bln rupees, against 62.45 bln rupees at 1030 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.82-6.87%. (Siddhi Chauhan)

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India Gilts: Seen tad up due to fall in US ylds before US CPI print

 

MUMBAI – Prices of government bonds are seen opening a tad higher due to an overnight fall in US Treasury yields. However, traders may refrain from placing aggressive bets due to caution ahead of US CPI data, due at 1800 IST, dealers said.

 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.82-6.87%, against 6.85% on Tuesday. 

 

The yield on the 10-year US Treasury note fell to 3.64% from 3.72% at the time the Indian market closed 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 on Tuesday ahead of the release of US inflation figures later today. The headline Consumer Price Index in the US is expected to rise 0.2% on month in August, unchanged from the previous month, as per a poll by Reuters. On a yearly basis, inflation is seen at 2.6% last month, down from 2.9% in July. 

 

This is the last data point that would indicate the health of the US economy and help investors to gauge the quantum of rate cuts before the Federal Open Market Committee's meeting next week. Currently, the odds of a 50-basis-point rate cut at the FOMC's September meeting are 33%, against 30% on Tuesday, according to the CME FedWatch tool. The majority sees a more moderate 25-bps rate cut. 

 

On the domestic front, traders await the release of domestic CPI data for August on Thursday. If India's consumer inflation is lower than expected, it could quicken the loosening of monetary policy in India, and prompt the Monetary Policy Committee to change its "withdrawal of accommodation" stance. According to an Informist poll, India's CPI inflation is seen at 3.6% in August, the second consecutive month it would have stayed below the Reserve Bank of India's target of 4%.

 

The domestic inflation print has been a topic of discussion in the market. While many traders expect the data to be well within the consensus, ranging from 3.4% to 3.6%, a few see the data falling to as low as 3.2%. Some traders are of this view due to the cooling prices of vegetables on month in August, dealers said. (Siddhi Chauhan)

 

End

 

US$1 = 83.98 rupees

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

 

Edited by Ashish Shirke

 

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