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Informist, Friday, Sep 13, 2024

By Srijita Bose

MUMBAI – Government bond prices ended higher after the Reserve Bank of India cancelled the remaining two auctions of Treasury bills this quarter. Traders expect further borrowing cuts in Oct-Mar and this, coupled with an easing rate cycle, led them to pick up gilts across tenures, dealers said. The yield on the 10-year benchmark gilt fell below 6.80% for the first time in 29 months.

The 10-year benchmark gilt ended at 102.15 rupees, or 6.79% yield, against 102.04 rupees, or 6.81% on Thursday. The benchmark yield ended at its lowest since Mar 30, 2022, for the third consecutive day.

The RBI on Thursday 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. Initially, traders preferred bonds maturing in up to seven years, and the positive sentiment became more widespread despite a disappointing CPI inflation print for August.

"The euphoria created due to a cut in T-bills supply, combined with US rate cut expectations, saw a rally across bonds of different tenures," a dealer at a state-owned bank said. The sentiment was only heightened after the benchmark yield fell below the crucial 6.80% mark. 

The government revised its net T-bill borrowing aim to (-)500 bln rupees from 500 bln rupees in the full Budget for 2024-25 (Apr-Mar). It also trimmed its gross borrowing target through dated securities by 120 bln rupees to 14.01 trln rupees. Further cuts in issuance of dated securities might be announced when the RBI details the borrowing calendar for Oct-Mar, towards the end of the month, dealers said.

The 10-year gilt yield may fall to as low as 6.75% before the Federal Open Market Committee's rate decision on Wednesday. Dealers said some traders sold before the long weekend, and gilts gave up some gains towards the end of trade. Money markets will be shut on Monday for Id-e Milad.

Foreign banks may have sold bonds at a profit after being net buyers for three straight days, according to Clearing Corp of India data. State-owned banks were likely to be net sellers, while some other banks were on the buying side, dealers said.

On Tuesday, the US Federal Open Market Committee will commence its two-day meeting to review monetary policy. Currently, the CME FedWatch tool shows Fed fund futures' expectations of a 50-basis-point rate cut at 49%, against only 28% a day ago, while the remaining priced in a 25-bps rate cut. Dealers said that even if the Fed did not cut rates by 50 bps in September, traders would look forward to the policy statement, which might indicate further rate cuts during the year. Fed funds futures indicated around 100 bps of rate cuts in 2024.

Incoming data in the US and India spurred demand for Indian gilts after a month of stagnation and consolidation in prices, dealers said. Data released on Thursday led a mixed reaction after India's August CPI inflation came in at 3.65%, higher than estimated. Though the print lowered expectations of the Monetary Policy Committee softening its policy stance in October, dealers remained positive on the possibility of a rate cut in December. Dealers said they expected the RBI to soften its tone on monetary policy at the upcoming meeting in October due to a slowdown in the global economy.

During the day, the government sold 110 bln rupees of the 2031 gilt and 110 bln rupees of the 7.46%, 2073 gilt at 1030-1130 IST. The cut-off prices on the gilts set by the Reserve Bank of India were higher than expected in an Informist poll. Dealers said the euphoria in the market due to expectation of a cut in the government's borrowing led to good demand both at the auction and the secondary market. 

Private and state-owned banks are likely to have secured the most stock of the 2031 gilt, dealers said. Domestic banks are building up larger buffers of liquid assets due to impending tightening of the guidelines on liquidity coverage ratio. Dealers said a few foreign banks also picked up the seven-year paper at the auction, and foreign portfolio investors bought the paper in the secondary market after the auction. Life insurers picked up most of the 50-year gilt's supply, with some demand also due to bond forward-rate agreements, dealers said. "The auction showed robust demand but after that, the market did not move much as some traders sold their heavy positions," a dealer at a private bank said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover for the day was 811.30 bln rupees, against 699.65 bln rupees on Thursday. No trades were settled today under the wholesale digital rupee pilot compared to two trades worth 100 mln rupees settled the previous day.

OUTLOOK

Gilts are not traded on Saturdays. Money markets will be closed on Monday the occasion of Id-e-Milad. On Tuesday, government bond prices are seen opening steady before the FOMC meeting that starts later in the day.

Eight states will raise 135 bln rupees through bonds on Tuesday, less than half the amount for the week in the indicative calendar for Jul-Sep. Demand is seen firm at the auction, especially as investors stock up on bonds following the cancellation of two T-bill auctions in September.

The movement of crude oil prices may also affect gilt prices. 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 6.75-6.85%. 

India Gilts: Remain up after auction result highlights firm demand

MUMBAI--1510 IST--Prices of government bonds remained up following the results of the 220-bln-rupee weekly gilt auction. Traders who missed out on the 7.02%, 2031 gilt at the auction flocked to the secondary market to buy the bond, dealers said.

The government sold 110 bln rupees of the 2031 gilt and 110 bln rupees of the 7.46%, 2073 gilt at 1030-1130 IST. The cut-off prices on the gilts set by the Reserve Bank of India were higher than expected in an Informist poll. The central bank accepted only 22 competitive bids for the seven-year gilt, and several banks missed out on the bond after making opportunistic bids at lower prices, dealers said.

The cancellation of two Treasury bill auctions worth 400 bln rupees in the remainder of September and expectations of a US rate cut next week resulted in strong demand for fresh supply, dealers said. The 10-year gilt yield today fell below 6.80% for the first time since March 2022. Since the yield on the 10-year broke below 6.80%, there is euphoria in the market which continued in the gilt auction, dealers said.

Bids by private and state-owned banks dominated the auction, and they are likely to have secured the most stock of the 2031 gilt, dealers said. Domestic banks are building up larger buffers of liquid assets due to impending tightening of the guidelines on liquidity coverage ratio. Foreign portfolio investors were also keen on the bond, though they may have missed out at the auction and foreign banks were buying the gilt in the secondary market. Life insurers picked up most of the 50-year gilt's supply, with some demand also due to bond forward-rate agreements, they said.

Traders were of the view that even though India's August CPI was at 3.65% and not lower as expected by the market, RBI's Monetary Policy Committee would ease its tone on monetary policy at the upcoming meeting in October due to a slowdown in the global economy.

"Traders are not ready to sell yet, they want to buy and carry it along the rally," a trader at a primary dealership said. The 10-year gilt yield may fall to as low as 6.75% before the FOMC rate decision on Wednesday. A further rise in prices was unlikely before the weekend, but the traders did not rule anything out due to the large purchases seen near the end of the day on Thursday, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 646.40 bln rupees, sharply up from 194.50 bln rupees at 1430 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.78-6.82%. (Cassandra Carvalho and Srijita Bose)  

India Gilts: Up on T-bill borrow cut; MPC stance change hopes persist

MUMBAI--1030 IST--Prices of government bonds rose after the Reserve Bank of India's announcement of a 400-bln-rupee Treasury bill supply cut on Thursday, dealers said. Easier liquidity conditions aided demand for short-term bonds, while hopes of a softer monetary policy stance persisted.

Replacement demand for T-bills maturing over the next two weeks has translated to more demand for gilts maturing within three years, dealers said. The yield on short-term bonds fell more than those maturing in 10 years or more. Private banks were likely the most aggressive bond buyers in the secondary market, while primary dealers continued to cover short bets in the 7.02%, 2031 gilt despite its inclusion in the auction at 1030-1130 IST, dealers said. 

The rise in bond prices comes amid a fall in the five-year overnight indexed swap rates, likely due to offshore flows and domestic entities hitting stop-losses on paid fixed rate positions, dealers said. Expectations of a rate cut by the US Federal Open Market Committee's meeting next week also contributed to foreign portfolio investors buying domestic gilts. This was despite India's CPI inflation in August printing at 3.65%, against 3.60% in July, and above bond traders' hopes of a 3.2% reading.

A day after India's headline inflation rate for August came in below the RBI's 4% target for the second consecutive month, Governor Shaktikanta Das today said the central bank still has some "distance to cover" and can't "afford to" ignore prices. Regardless, traders still bet that the tone of policymakers at the next policy review in October would signal an easing of policy, following recent growth and inflation data, dealers said. The next MPC meeting is scheduled on Oct 7-9.

"We know the stance has changed, only a verbal confirmation is needed at the MPC (Monetary Policy Committee)," a dealer at a state-owned bank said. "We have a positive market, there is high liquidity, good foreign inflows, all factors conducive for yields to fall."

A divergence in policy views globally is what caused gilt prices to trade in a thin band in the past few months, but the market has overcome that barrier, dealers said. The 10-year benchmark gilt yield fell below 6.80% for the first time since March 2022, and has hit fresh 29-month lows for the past three days.

In addition to prices, trade volumes were up before the weekly gilt auction. The government will sell 110 bln rupees of the 7.02%, 2031 gilt, and 110 bln rupees of the 7.46%, 2073 gilt.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 266.00 bln rupees, against 61.10 bln rupees at 1030 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.75-6.85%. (Cassandra Carvalho)

India Gilts: May open mixed on India Aug CPI, T-bill supply cut cues

NEW DELHI – Government bond prices may open on a mixed note today. While the 10-year benchmark 7.10%, 2034 gilt may open a tad lower after India's August CPI inflation was slightly above market expectations, short-term bonds are expected to be in favour after a reduction in the supply of Treasury bills, dealers said.

Yield on the 2034 bond is seen at 6.79-6.85% today, against 6.81% on Thursday. A rise in prices towards the end of trade on Thursday pulled down the benchmark yield to its lowest close since March 30, 2022. 

After market hours, data showed India's CPI inflation rose to 3.65% in August from a revised 3.60% in July. An Informist poll had estimated the figure at 3.6%, and gilt traders had bet on it falling to around 3.2%.

Food price inflation was 5.66% last month, against 5.42% in July. The print may lower expectations of the Monetary Policy Committee softening its policy stance in October, though rate cuts may still occur by December, dealers said.

On the other hand, RBI on Thursday 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.

Banks would look to replace the short-term securities with bonds maturing up to five years. The yield spread of the 10-year gilt over the three-year benchmark 7.02%, 2027 bond and the five-year benchmark 7.04%, 2029 gilt are expected to widen by 2-3 basis points, dealers said. Those spreads were 11 bps and 9 bps on Thursday, respectively.

Traders may be aggressive with their bets in the early hours of trade despite the 220-bln-rupee weekly gilt auction at 1030-1130 IST, dealers said. This is because a majority of the fresh supply will be absorbed by investors to match their liabilities. State-owned and private banks are expected to bid aggressively for the 110 bln rupees of the 7.02%, 2031 gilt on offer as they build up larger buffers of liquid assets due to an impending tightening of the guidelines on liquidity coverage ratio. The 50-year benchmark 7.46%, 2073 gilt is likely to be bought by largely life insurers, including a state-owned firm, dealers said.

In the US, weekly jobless claims were at 230,000 in 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 rate decision on Wednesday, with expectations not changing materially after the US data.

However, yield on the 10-year benchmark US Treasury note eased to 3.65% at 0830 IST from 3.67% at the end of Indian market hours on Thursday. Analysts' comments moved up bets on a 50-bps rate cut overnight to 43% from 15% at 2100 IST on Thursday, according to the CME FedWatch tool. Fed funds futures reflected a 57% chance of a modest 25-bp rate cut.  (Aaryan Khanna)

End

Edited by Avishek Dutta

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