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Informist, Thursday, Sep 12, 2024

By Cassandra Carvalho

MUMBAI – Government bond prices ended higher after traders placed aggressive bets ahead of India's CPI data for August at 1730 IST today. The spurt in prices happened in the latter half of the day, after bonds had opened lower due to an overnight rise in US Treasury yields.  

The 10-year benchmark 7.10%, 2034 bond closed at 102.04 rupees, or 6.81% yield, against 101.89 rupees, or 6.83% on Wednesday. The benchmark yield ended at its lowest since Mar 30, 2022, for the second straight day. 

Traders estimated that India's CPI print for August may fall to around 3.2%, against an estimate of 3.6% in an Informist poll, the second straight month of the print being below the Reserve Bank of India's inflation target of 4%. In July, headline inflation was 3.54%. A reading near 3% could lead to RBI officials, including Governor Shaktikanta Das, softening his tone on inflation control, or the Monetary Policy Committee easing its stance to 'neutral' from 'withdrawal of accommodation', at the next policy review in October, dealers said. Data released after market hours today showed India's CPI inflation print for August rose to 3.65% from a revised 3.60% in July.

"The narrative is all driven by CPI, which has led to some buying and a lot of short covering," a dealer at a primary dealership said. "Even if I disagree with the current price levels, you can't really bet against the market through a short (sale), since interest rate cuts are coming sooner or later."

Gilt prices had moved in a narrow range over the past month, despite favourable factors, including demand exceeding supply and a sustained fall in US Treasury yields. However, traders had been wary of buying bonds due to the RBI's strident tone on inflation control. Das has continuously pushed back against cutting rates in India in a hurry, until CPI inflation aligns to the RBI's 4% inflation target on a durable basis. According to the central bank's projections, this is not expected until beyond Apr-Jun 2025.

The price momentum continued to trend higher by the end of the day due to short-covering by traders before the data release, and noting increasing purchases by investors, including some state-owned banks, dealers said. In addition, there was speculation that a large institutional investor bought a large quantum of gilts in the second half of trade.

Bond prices had opened lower today due to an overnight rise in US yields after US CPI inflation for August was mixed, and reduced the chances of a 50-basis-point rate cut by the Federal Open Market Committee, as some traders had anticipated. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors.

US CPI rose 0.2% on month in August, in line with expectations, and similar to the rise in July. On a yearly basis, the CPI was up 2.5%, rising by the slowest pace since February 2021. However, core CPI was up 0.3% in August, more than the expectation of a 0.2% rise. The CME FedWatch tool showed expectations of a 50-bps rate cut in the US next week dimmed to around 15%, with Fed funds futures now showing a vast majority expecting only a quarter-point cut.

The impact on the gilts market was mitigated as traders held onto their bets, awaiting India's CPI print and a potential softening of domestic monetary policy. Moreover, dealers said the yield on the 10-year gilt was likely to fall to 6.80% rather than rise from Thursday's close. Those expectations were well rewarded towards the end of the day as traders placed larger bets close to the release of India's inflation print. Trade volumes were muted before the rise in prices after 1500 IST.

"We are not blindly following US yields now, the India CPI data is more important and yields will move lower only if the CPI data misses market's expectations," a dealer at a state-owned bank said.

In the first half of the day, foreign banks and private banks were likely buyers, while state-owned banks had been selling gilts, dealers said. Primary dealers were also placing short bets in small quantities ahead of the 220-bln-rupee weekly gilt auction on Friday.

The government will sell 110 bln rupees of the 7.02%, 2031 gilt and 110 bln rupees of the 7.46%, 2073 gilt on Friday. Demand at the auction is expected to be firm – banks are likely to buy the seven-year gilt to match their liabilities, while life insurers will pick up the 50-year bond, dealers said.

The market-wide turnover today was 702.60 bln rupees, against 740.75 bln rupees on Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. Two trades worth 100 mln rupees were settled under the wholesale digital rupee pilot, while no trades were settled on Wednesday.

OUTLOOK

On Friday, gilt prices may open steady ahead of the 220-bln-rupee gilt auction. Views on the movement in gilt prices were mixed after a number of factors played out after market hours, dealers said. 

The CPI inflation print for August was higher than expected at 3.65%, against an estimate of 3.6% in an Informist poll and traders' expectations of 3.2%. Food price inflation was 5.66% last month, against 5.42% in July. The print may lower expectations of the RBI's Monetary Policy Committee softening its policy stance in October, though rate cuts may still occur by December, dealers said.

In a release after market hours today, the RBI cancelled two auctions of Treasury bills scheduled for Wednesday and Sep 25, in consultation with the government. This would reduce the gross supply of T-bills in Jul-Sep by 400 bln rupees. After the announcement, traders are likely to stock up on short-term bonds, which may outweigh the impact of the disappointing CPI print, dealers said.

In the US, weekly jobless claims stood at 230,000 for the week ended Saturday, against 225,000 estimated by Dow Jones. The US producer prices index rose 0.2% on month in August, in line with expectations, though stripped of volatile factors such as food and fuel, the price rise was slightly higher than anticipated.

All eyes are on the Federal Open Market Committee's meeting next week, with expectations not changing materially after the US data. At 1930 IST, the CME FedWatch tool showed that Fed fund futures reflected an 87% probability of a 25-bps rate cut, with 13% pricing in a 50-bps cut. 

The European Central Bank today cut its deposit facility rate by 25 basis points to 3.50%, in line with expectations, following one in June and a pause in July.

Demand at Friday's auction is expected to be firm, but this will not curb demand in the secondary market as the bonds to be auctioned are irrelevant for traders other than for asset liability management purposes, dealers said.

The movement of crude oil prices may also affect gilt yields. Foreign fund inflows are likely to continue because of 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.

India Gilts: Up on bets of Aug CPI leading to softer monetary policy

NEW DELHI--1630 IST--Government bond prices reversed early losses and rose as traders bet on a soft CPI inflation print for August cooling the tone of monetary policy in India, dealers said. Traders expect India's headline consumer inflation to cool to as low as 3.2% in August from 3.54% in July. An Informist poll of economists estimated the print at 3.6%.

Gilt prices were moving in a narrow range over the past month, despite favourable factors, including demand exceeding supply and a sustained fall in US Treasury yields. However, traders had been wary of buying bonds at lower yields as Reserve Bank of India Governor Shakikanta Das has continuously pushed back against cutting rates in India in a hurry, until CPI inflation aligns to the RBI's 4% inflation target on a durable basis. According to the central bank's projections, this is not expected until beyond Apr-Jun 2025.

"Ultimately, the (RBI) governor has to change his tone some time. A 10-paise rise in prices (today) would be justified if the CPI being near 3% is what makes him become at least a little more dovish on monetary policy," a dealer at a private bank said. 

Unlike on Wednesday, when foreign banks and a fall in overnight indexed swap rates led to a rise in bond prices, gilts gained while OIS rates were largely unchanged. Swap rates had undergone a sharp fall already, led by offshore flows, and domestic traders were not keen to trade OIS rates but rather buy bonds at current levels, dealers said. 

Short-sellers would be looking for cover at the end of trade, further pushing prices higher. Some dealers also speculated about a large purchase by an institutional investor. The 10-year gilt yield fell to a fresh 29-month low, with traders expecting it to fall to 6.80% if inflation is lower than expected, 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 366.95 bln rupees at 1230 IST on Wednesday. For the rest of the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.80-6.84%. (Aaryan Khanna)

India Gilts: Little changed before India CPI; rise in US ylds weighs

MUMBAI--1300 IST--Prices of government bonds were little changed as traders avoided large bets ahead of the release of India's CPI data for August due at 1730 IST, dealers said. A rise in US Treasury yields overnight still weighed on government bond prices.

India's CPI inflation is seen at 3.6% in August, according to an Informist poll, the second straight month below the RBI's inflation target of 4%.

In the poll, Nomura had the lowest estimate on headline CPI, at 3.1%. Some traders expect it to fall as low as 3.2%, which is seen aiding bets on a quicker easing in domestic monetary policy. Following the print, traders expect the 10-year gilt yield to fall rather than rise, and they avoided trimming their portfolios, dealers said.

Moreover, the lack of relevant supply for most traders at the auction on Friday prevented a sharp fall in prices, dealers said. The government will sell 110 bln rupees worth of the 7.02%, 2031 gilt and 110 bln rupees of the 7.46%, 2073 gilt. Demand at the auction is seen firm; banks will likely buy the seven-year gilt to match their liabilities, while life insurers will pick up the 50-year bond. Some primary dealerships trimmed holdings ahead of the auction, dealers said.

Meanwhile, the yield on the 10-year US Treasury note rose to 3.68%, against 3.61% at 1700 IST on Wednesday. Headline US CPI inflation for August was a tad below expectations, but core CPI accelerated from July and reduced the odds of a sharp rate cut in the US when the Federal Open Market Committee reviews monetary policy next week, dealers said. 

"The enthusiasm for a 50 basis point cut by the US Federal Reserve has died down, so traders are no longer placing aggressive bets like they did yesterday (Wednesday)," a dealer at a state-owned bank said. The yield on India's 10-year gilt fell to 6.83%, an over 29-month low on Wednesday due to aggressive buys from foreign banks. 

At 1300 IST, the CME FedWatch tool showed that Fed fund futures reflected an 87% probability of a 25 bps rate cut by the Fed next week, with a 13% probability of a 50 bps cut. Traders will also look for US Producer Prices Index due 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 188.60 bln rupees, against 366.95 bln rupees at 1230 IST on Wednesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.81-6.85%. (Cassandra Carvalho)

India Gilts: Down on overnight rise in US yields; eyes on India CPI

MUMBAI--1010 IST--Prices of government bonds were down today on the back of an overnight rise in US Treasury yields, dealers said. However, traders may refrain from placing aggressive bets ahead of the India CPI data for August due post market hours, dealers said. 

Yield on the 10-year US Treasury note rose to 3.67% from 3.62% at the end of Indian market hours on Wednesday. US yields rose overnight as investors assessed a mixed consumer price index report and its implications for the Federal Reserve's rate move next week.

US CPI rose 0.2% on month in August, in line with expectations, and similar to the rise in July. On a yearly basis, the CPI was up 2.5%, rising by the slowest pace since February 2021. However, core CPI was up 0.3% in August, more than the expectation of a 0.2% rise.

"Yesterday (Wednesday) many private banks went long (bought) with a view of weaker US CPI data. While CPI was along expected lines, core CPI rose month-on month," a dealer at a private bank said. "This is why private banks are selling right now." As per data from Clearing Corp of India, private banks bought 31.80 bln rupees worth of gilts on Wednesday.

The fall in prices was, however, limited as some state-owned banks stepped up gilt purchases. Data from Clearing Corp of India showed state-owned banks have been selling for seven consecutive trading sessions. 

"Although these levels are not as lucrative as 6.82% (yield on the 7.10%, 2034 bond) but still PSUs (state-owned banks) have already sold in the previous sessions right," a dealer at a state-owned bank said. "So there is no harm in buying in light volumes right now." 

If the yield on the 10-year gilt drops below 6.83%, state-owned banks may turn from sellers to buyers as it is seen as a technically crucial level, dealers said. However, prices are expected to remain in a thin band during the day as traders look ahead to India's CPI data, and what it would suggest on a potential monetary policy stance change in India. India's CPI inflation is expected at 3.6% in August, according to an Informist poll, the second straight month below the RBI's inflation target of 4%.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 50.75 bln rupees, against 214.25 bln rupees at 1030 IST on Wednesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.81-6.85%. (Siddhi Chauhan)

India Gilts: Seen steady on caution ahead of India CPI data for Aug

MUMBAI – Prices of government bonds are seen opening steady on caution ahead of the release of India's CPI data for August post market hours, dealers said. A further rise in US yields may also weigh on gilt prices, they said. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.81-6.85% today against the 6.83% close on Wednesday. 

The yield on the 10-year US Treasury note rose to 3.67% from 3.62% at the end of Indian market hours on Wednesday. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors.
 

The data released post market hours on Wednesday showed US CPI rose 0.2% on month in August, in line with expectations, and similar to the rise in July. On a yearly basis, the CPI was up 2.5%, rising by the slowest pace since February 2021. However, the core CPI, which excludes the food and energy components whose prices can sometimes be volatile, was up 0.3% in August, more than the expectation of a 0.2% rise. In July, the core CPI had risen by 0.2%. The rise in core inflation has scuppered hopes of a 50-basis-point rate cut by the US Federal Reserve.

After the release of US CPI data, the odds of a 50 bps rate cut by the US Federal Open Market Committee fell to 15% from 34% Tuesday, according to the CME FedWatch tool. The chances of a 25-bps rate cut rose to 85%.

Some traders who had bet aggressively on the US CPI data may unwind their positions during the day, dealers said. A few traders may also take cues from the US core CPI data which was slightly higher than expected, dealers said. Traders now await the release of Indian CPI data for August, which is expected to be at 3.6%, according to an Informist poll. If the data comes in as expected, it will be the second consecutive month it stays below the Reserve Bank of India's inflation target of 4%.

If India's retail inflation is lower than expected, it could quicken the loosening of monetary policy, and prompt the Monetary Policy Committee of the Reserve Bank of India to change its "withdrawal of accommodation" stance. 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 3.4-3.6%, a few see the data falling to as low as 3.2% due to the cooling prices of vegetables, dealers said. (Siddhi Chauhan)

End

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

With inputs from Aaryan Khanna and Srijita Bose

Edited by Avishek Dutta

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