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Informist, Monday, Sep 16, 2024

By Srijita Bose

MUMBAI – Prices of government bonds ended sharply higher as investors were keen to stretch their bond portfolios to the maximum to capture a likely rise in prices after the US Federal Open Market Committee's rate decision on Wednesday, dealers said. State-owned banks and foreign investors were likely large buyers, pulling down the yield on the 10-year benchmark to its lowest close since Feb 25, 2022.

The 10-year benchmark 7.10%, 2034 gilt ended at 102.35 rupees or 6.76% yield against 102.15 rupees or 6.79% on Friday.

"I think everyone picked up the 10-year bond today, as there was a state of fear of missing out in the market, but public-sector banks bought in larger quantities today after clearing their coffers for the past week or so," a dealer at a state-owned bank said. 

State banks had sold 200 bln rupees worth of gilts in the secondary market between Sep 9 and Sep 12, according to Clearing Corp of India data. The purchases were in the held-for-trading portfolio in the hope of short-term gains, dealers said. State-owned banks have kept a majority of their purchases for the weekly gilt auctions, but with only the 7.02%, 2031 bond and the 7.46%, 2073 gilt at auction last week, they had space on their books.

"State-owned banks bought when the yield (on 10-year benchmark 7.10%, 2034 gilt) touched a new low of 6.77% as they expected a further fall in yields to sell at a profit," a dealer at a private bank said.

Foreign portfolio investors continued to purchase bonds due to the appealing interest rate differential between the US and India bond yields, which is expected to widen further if the Federal Open Market Committee cuts rates sharply this week, dealers said. Traders were optimistic of a 50-basis-point cut, with the CME FedWatch tool also showing a 65% chance of a 50-bps cut on Wednesday, against only 30% last week. Bond traders had earlier priced in only a 25-bps rate cut in September. The sharp rise in gilt prices since late last week was attributed to growing bets on a 50-bps rate cut in the US, dealers said.

In addition to FPIs, foreign banks were also likely gilt buyers for proprietary books as they typically stock up on gilts at this time of the month to sell to passive investors when India's weightage on JP Morgan's emerging market bond index grows at the end of the month, dealers said. India's gilts will reach a 4% weightage on JP Morgan's Government Bond Index – Emerging Market suite on Sep 27, as part of its staggered inclusion.

Even if the Fed cuts rates by only 25 bps on Wednesday, dealers will keep a keen eye on the path of future rate cuts. Along with the policy outcome, US Federal Reserve officials will give out a summary of their economic projects on interest rates, growth and inflation. Fed funds futures have priced in over 100 bps of US rate cuts in 2024, according to the FedWatch tool.

Trade volume started off on a sluggish note on caution before the FOMC meeting begins Tuesday, particularly with a shift in holiday that left many treasury desks short-staffed as traders were on scheduled leaves, dealers said. The price momentum that built up through the day surprised several traders, with the 10-year 7.10%, 2034 bond notching its fifth straight day of gains.

The government securities market, foreign exchange market, money market, and rupee interest rate derivatives market were open today and will remain shut on Wednesday. The Reserve Bank of India on Saturday notified Wednesday as a holiday, after the government of Maharashtra shifted the public holiday for Id-e-Milad to Wednesday from today.

There was also a change in the settlement of secondary market transactions in the government securities market, the foreign exchange market, the money market, and the rupee interest rate derivatives market that are due on Tuesday, the RBI said. This was expected to keep traders and investors on the sidelines today. However, the market made use of an extra day of trade before the crucial US rate decision, and may continue to be volatile this week.

Traders may place large bets on the FOMC outcome, and primary dealerships are likely to be significant participants through the week anticipating sizeable price swings, dealers said. At the day's high, state-owned banks likely trimmed their holdings at a profit.

"This is going to be the first US rate cut after over a year of waiting, so don't expect the volatility to stop," a dealer at a primary dealership said. "The volatility is going to be difficult to explain sometimes, but that was always going to be the case with more foreign investors coming into the market."

Volumes were initially concentrated in the 7.10%, 2034 gilt, the 7.18%, 2033 gilt, and the 7.23%, 2039 gilt before the jump in prices became more widespread for gilts maturing in above five years, dealers said. Traders also sold the 2033 bond to buy the 15-year benchmark gilt as the spread of the 2039 bond over the 10-year benchmark gilt had become more favourable. The 2039 bond was the third-most traded gilt in the secondary market today. Some domestic banks were selling the 2033 bond to FPIs, dealers said. 

The market-wide turnover today was 622.60 bln rupees, against 811.30 bln rupees on Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. No trades were settled today under the wholesale digital rupee pilot, similar to Friday.

OUTLOOK

On Tuesday, government bond prices may open steady on caution ahead of the US FOMC outcome on Wednesday, dealers said. Prices may continue their upward momentum ahead of the FOMC, with domestic money markets shut on Wednesday before the rate decision.

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 Treasury-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 6.74-6.80%.

India Gilts: Rise more after state-owned bks, FPIs amp up purchases

MUMBAI--1545 IST--Prices of government bonds rose further as state-owned banks and foreign portfolio investors amped up their purchases, dealers said. State-owned banks picked up bonds after a week of being the largest sellers in the market. The yield on the 10-year benchmark gilt fell to its lowest level since Feb 28, 2022.

Foreign portfolio investors continued to purchase bonds due to the appealing interest rate differential between the US and India bond yields, which would widen further after an expected rate cut by the Federal Open Market Committee this week, dealers said. Traders were optimistic of a 50-basis-point cut, with the CME FedWatch tool also showing a 59% chance of a 50-bps cut FOMC outcome on Wednesday, against only 30% last week.

State-owned banks have turned buyers after selling gilts heavily in the secondary market. The purchases were in the held-for-trading portfolio in the hope of short-term gains, though they may also be intraday sellers as prices rise, dealers said. State-owned banks have kept a majority of their purchases for the weekly gilt auctions, but with only the 7.02%, 2031 bond and the 7.46%, 2073 gilt at auction last week, they had space on their books, dealers said.

"PSU banks have been on the selling side in the past week, and now they want to up their portfolio," a dealer at a state-owned bank said. State-owned banks were net buyers on Friday, but sold 200 bln rupees of gilts Mon-Thu, after nearly 300 bln rupees worth of secondary market gilt sales in August, according to Clearing Corp of India data.

Trade volumes were initially low as several traders were on leave due to the shift in holiday for Eid-e-Milad, which was initially scheduled for today. Volumes were initially concentrated in the 7.10%, 2034 gilt, the 7.18%, 2033 gilt, and the 7.23%, 2039 gilt before becoming a widespread phenomemon, dealers said. 

Traders are selling the 2033 bond to buy the 15-year benchmark gilt as the spread of the 2039 bond over the 10-year benchmark gilt had become more favourable, dealers said. The 2039 bond was the third-most traded gilt in the secondary market. Most domestic banks were selling the 2033 bond to FPIs, they said. 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 543.20 bln rupees, against 688.10 bln rupees at 1530 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.75-6.82%. (Cassandra Carvalho)

India Gilts: Up as expectations of 50-bps cut at FOMC spur FPI inflow

MUMBAI--1245 IST--Prices of government bonds were up as foreign portfolio investors bought gilts ahead of the Federal Open Market Committee meeting this week, dealers said. Expectations of a 50-basis-point interest rate cut in the US rose, which drove up bond prices after a sluggish start to today's trade.

A fall in US yields triggered by hopes of a sharper interest rate cut would widen the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors. Fed fund futures priced in a 59% chance of a 50-bps cut in the federal funds rate at the FOMC outcome on Wednesday, against a 30% chance seen a week ago. Domestic traders have broadly been factoring in only a 25-bps rate cut in the US this week, dealers said.

Several gilt traders were on leave as markets were earlier scheduled to be shut today. The Reserve Bank of India on Saturday notified the public of a change in holiday from today to Wednesday. This reduced the trade volumes, dealers said.

The unforeseen market holiday on Wednesday leading up to the FOMC outcome at 2330 IST is expected to lend volatility to gilt prices on Tuesday, dealers said. Gilt prices may remain volatile, and track US Treasury yields ahead of the US rate decision, they said. Along with the policy outcome, US Federal Reserve officials will also give out a summary of their economic projects on interest rates, growth and inflation.

"It's not just the rate cut, but the variables accompanying it, such as the Fed's dot plot, neutral rate, views for next year, which will affect the market," 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 was 242.05 bln rupees, against 459.95 bln rupees at 1230 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.77-6.82%. (Aaryan Khanna)

India Gilts: Steady; shift in holiday pulls down trade volumes

India Gilts: Steady; shift in holiday pulls down trade volumes

NEW DELHI--0935 IST--Government bond prices were steady due to caution ahead of the US Federal Open Market Committee's meeting that starts Tuesday. The shift in holiday to Wednesday from today kept trade volumes dull, dealers said.

The Reserve Bank of India said trades due for settlement on Tuesday would still get settled on that day, even as money markets were made operational today. While this was the least disruptive in terms of settlement and logistics, it also made the day's trading a "lame duck" session, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 7.50 bln rupees, against 115.70 bln rupees at 0930 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.77-6.82%.

Real money investors, such as those from mutual funds and insurance firms, are likely to stay away from the market. Even traders' limits are tied up on trades executed on Friday, particularly for the 220-bln-rupee government bond auction. Only three bonds – the 10-year benchmark 7.10%, 2034 gilt, the 7.40%, 2035 gilt and the 7.17%, 2030 gilt – have been traded so far. 

"Volumes are going to be really dull because trading limits are all tied up till tomorrow (Tuesday), and half the traders are not around at our desk or anyone else's," a dealer at a state-owned bank said. 

Market volatility is likely to pick up on Tuesday and continue through the truncated week as the US FOMC decision and comments by Federal Reserve officials are keenly awaited, dealers said. A statement of economic projections will be released along with the policy outcome on Wednesday, in which the officials will anonymously provide their views on key US indicators such as interest rates, growth and inflation. According to the CME FedWatch tool, Fed funds futures are showing more than half the market expects a 50-bps rate cut by the FOMC.

Domestic dealers said a more modest 25-bps rate cut was more likely to start the US rate-cutting cycle from over two-decade highs. However, they remained heavily invested in gilts on the view that prices will rise further as India's monetary policy loosening will also be brought forward after the US begins cutting rates, dealers said.  (Aaryan Khanna)

India Gilts: Seen steady on lack of cues; US FOMC outcome Wed awaited

NEW DELHI – Government bond prices are likely to open steady today due to a lack of fresh cues on both the domestic and global front. Traders await the US Federal Open Market Committee's rate decision at 2330 IST on Wednesday, which is seen as a key signal on the direction of interest rates globally, dealers said.

The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.76-6.83% today, against 6.79% on Friday. This was the lowest close on the benchmark yield since Mar 30, 2022. The 10-year yield fell 6 basis points last week after breaking a key technical level, after over a month of trading in a 6.84-6.89% band.

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-bps rate cut at 57%, against only 30% a week ago, while the remaining priced in a 25-bps rate cut. Heading into the week of the policy decision, this has been the first time in September that expectations of a sharp rate cut are higher than those of a modest one. Dealers said that even if the Fed did not cut rates by 50 bps, 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.

Trade volumes are likely to be lacklustre due to a shift in the market holiday. The government securities market, foreign exchange market, money market, and rupee interest rate derivatives market will be operational on Monday and remain shut on Wednesday, the Reserve Bank of India said in a notification on Saturday. This comes against the backdrop of the government of Maharashtra shifting the public holiday for Id-e-Milad to Wednesday from Monday. 

There will be no change in the settlement of secondary market transactions in the government securities market, the foreign exchange market, the money market, and the rupee interest rate derivatives market that are due on Tuesday, the RBI said. Investors' limits to trade in gilts may be tied up with auction stock, dealers said. Moreover, some treasury officials are also on scheduled leave and will be away from trading, they said.  (Aaryan Khanna)

End

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

Edited by Ashish Shirke

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