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Informist, Thursday, Sep 19, 2024

By Srijita Bose and Cassandra Carvalho

MUMBAI – Government bonds gave up some gains in the second half of the day because traders trimmed their portfolios ahead of the weekly gilt auction on Friday, dealers said. Gilt prices had surged earlier after the US Federal Open Market Committee cut rates by 50 basis points on Wednesday, which caught some traders by surprise.

The 10-year benchmark 7.10%, 2034 bond settled at 102.38 rupees, or 6.76%, against 102.21 rupees, or 6.78%, on Tuesday. India's money markets were shut on Wednesday for Id-e-Milad.

Earlier in the day, the yield of the 10-year gilt hit 6.7350%, its lowest level since Feb 21, 2022. The volatile market helped bond trade volume on the Reserve Bank of India's Negotiated Dealing System – Order Matching platform top 1 trln rupees for the first time since Jun 4.

Dealers said that after the sharp rise in prices during the first half of the day, primary dealers and private banks were likely selling bonds to make space for the fresh supply at the auction. Some state-owned banks also sold bonds at a profit, dealers said. Demand from foreign portfolio investors and foreign banks prevented a sharp fall from the day's high, they said.

"On an individual level, traders were short-selling to accommodate gilts at tomorrow's (Friday's) auction, but at a bank level dealers were booking profits," a dealer at a state-owned bank said.

The government will sell 200 bln rupees worth of the 7.10%, 2034 bond and 110 bln rupees of the 7.34%, 2064 gilt at the auction on Friday. While auction demand is seen firm, the heavy supply of the 10-year bond would likely allow traders to pick up the gilt at a discount at the auction, dealers said.

Earlier, prices shot up after traders placed bets that the RBI would ease monetary policy sooner rather than later after the FOMC's sharp rate cut on Wednesday. Dealers said that mutual funds were likely buying gilts through the day, since they trimmed holdings worth nearly 40 bln rupees on Tuesday. The presence of an index fund's buys, in addition to active foreign inflows, also led to sharp gains in gilt prices.

Traders were positive that the RBI's Monetary Policy Committee would take cues from the FOMC's decision to cut rates sharply, and would change its stance from "withdrawal of accomodation" to "neutral" at its policy review next month. Moreover, the certainty of pricing in a rate cut in India by at least December had risen, dealers said. Even the most sceptical said RBI Governor Shaktikanta Das may ease his tone, and acknowledge risks to the central bank's growth forecast of 7.2% GDP growth in 2024-25 (Apr-Mar).

"Now that the Fed has cut rates by 50 bps, RBI needs to wake up and change the stance at the least, or it will fall behind the curve," a dealer at a private bank said.

Today, CRISIL chief economist Dharmakirti Joshi said at an event that the odds of a rate cut in India at the October policy have increased. He is among the handful of analysts who did expect a 25-basis point rate cut in October, even before the FOMC outcome. If not rate cuts, the RBI may ease monetary policy through other ways, including formally allowing more liquidity in the banking system, dealers said. Some dealers said the 10-year benchmark yield could fall below 6.70% by the end of this month, hitting fresh 30-month lows.

"Two weeks back, reaching a 6.73% level on the 10-year yield seemed like a stretch, but the kind of fall we have seen since then, I think it is highly possible that the yield could reach 6.62-6.67% levels," said a dealer at another private bank.

Regardless, traders remained split on the further trajectory of monetary policy across the globe, one of the reasons why volumes were so high and prices volatile. The price of the 7.10%, 2034 gilt had fallen in the opening trade, and heading into market hours traders had expected prices to fall due to an overnight rise in US Treasury yields, the first reaction to the FOMC outcome.

Eleven of the 12 FOMC members voted for the 50-bps cut in interest rates, while Michelle Bowman voted for a more modest 25-bps cut. US Federal Reserve Chair Jerome Powell also said that sharp rate cuts should not be seen as a regular feature of the current rate easing cycle. The US rate-setting panel would continue to be data-dependent on making the call for a change in rates, he said at the post-FOMC press conference.

The updated summary of economic projections from US Fed officials guided for another 50-bps of cuts in 2024, though there were seven of 19 officials who saw no more 25-bps of further rate cuts. The projections also showed 100 bps of policy easing in 2025 to 3.25-3.50%, suggesting a 200-bps rate cut in total over the next 15 months.

At the market open, bond prices opened lower than at the time the Indian market closed Tuesday, tracking a rise in US Treasury yields. Dealers attributed the rise in US yields to US markets having already discounted the 50 bps cut. With the benchmark yield already dipping below the 6.75% mark, a key target for many investors, traders have begun to lighten their portfolios and initiate fresh ones only after the RBI gives a signal that it is ready to cut rates.  

"FOMC gave us direction, but its up to the MPC to sustain these price levels, otherwise the 10-year yield will return to the 6.80% level," a dealer at another state-owned bank said.    

The market-wide turnover today was 1.06 trln rupees, double the 527.90 bln rupees on Tuesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. Trade volumes are expected to return to the usual range of 300-500 bln rupees unless there are fresh cues of domestic rate cuts, dealers said. No trades were settled via the wholesale digital rupee pilot today, the same as on Tuesday.

OUTLOOK

On Friday, government bond prices may open lower as traders may sell bonds in the secondary market in order to pick up auction stock, dealers said. Gilt prices may also take cues from overnight movement of US Treasury yields.

Traders will also take cues from US unemployment claims data for the week ended Saturday released today by the US Bureau of Labor Statistics. Initial claims for state unemployment benefits fell 12,000 last week to a four-month low, seasonally adjusted value of 219,000. Crucial data points like the weekly unemployment claims will be monitored closely by the Fed to cement its stance on rate cuts for the year ahead, as the Fed has shifted its focus from inflation to strengthening the labour market, dealers said.

Dealers said demand at the auction is seen firm, as the benchmark 10-year gilt will attract investors from across the market. The 7.34%, 2064 gilt up for sale is also a top preference of life insurers and pension funds.

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. The subsequent fall in US yields after the Fed's 50 bps cut may increase foreign inflows due to an appealing interest rate differential between the yields of US Treasury notes and Indian gilts.

The movement of crude oil prices may also affect gilt prices. 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 6.74-6.82%.

India Gilts: Gains capped after surge; prices in narrow band

MUMBAI--1400 IST--Prices of government bonds were sharply up after aggressive bets by foreign portfolio investors and mutual funds, dealers said. After a surge in prices between 1000 and 1100 IST, domestic banks sold bonds at a profit, capping gains and leading to prices moving in a narrow range.

Dealers said that mutual funds were likely buying gilts, since they trimmed holdings worth nearly 40 bln rupees on Tuesday. The presence of an index fund's buys, in addition to active foreign inflows, also led to sharp gains in gilt prices. These purchases came after the US Federal Open Market Committee cut rates by 50 basis points on Wednesday, which was not fully priced in by the market, dealers said. The yield on the benchmark 7.10%, 2034 bond fell to 6.7350%, its lowest since Feb 21, 2022.   

At 2300 IST on Wednesday, Fed funds futures had priced in a 63% chance of a 50-bps rate cut ahead of the rate decision, according to the CME FedWatch tool. Gilt prices had fallen on Tuesday as traders booked profits in the run-up to the decision, with some fearing the rate-cut would be a more modest 25 bps, dealers said.

Once foreign investors began picking up bonds, prices of bonds surged, causing all traders to "unanimously" enter the market, in spite of a rise in US yields overnight, dealers said. The yield on the 10-year benchmark US Treasury note rose to 3.70% today from 3.61% at the time the Indian market closed Tuesday. Domestic money markets were shut for Id-e-Milad on Wednesday.

"An appealing risk-reward ratio of bond prices in a rate cut season, along with a distorted demand and supply chain in the Indian gilt market will sustain these levels for the rest of 2024-25 (Apr-Mar)," a dealer at a state-owned bank said.

However, hesitation in the market will continue to prevail until India's Monetary Policy Committee announces a rate cut, or at least a change of stance from "withdrawal of accomodation" to "neutral" this calendar year, caution about which will prevent the benchmark 10-year's yield from falling below 6.70%, dealers said. Others are more optimistic, and said the market may run ahead of the Monetary Policy Committee on monetary policy easing if the Reserve Bank of India's rate-setting panel, chaired by RBI Governor Shaktikanta Das, is too slow on cutting rates.

During the day, the yield of the benchmark 10-year bond is expected to remain within the 6.74-6.80% range. Gains will remain capped at the current level as domestic banks may continue to trim holdings before Friday's gilts auction, dealers said. The Reserve Bank of India will auction 200 bln rupees worth of the benchmark 10-year bond along with 110 bln rupees of the 7.34%, 2064 bond.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 796.40 bln rupees, sharply up from 335.40 bln rupees at 1330 IST on Tuesday. (Cassandra Carvalho)

India Gilts: Surge; short sellers cover bets after 50-bps US rate cut

MUMBAI--1055 IST--Prices of government bonds surged as traders covered their short bets after the US Federal Open Market Committee cut its policy rates by 50 basis points, which was not entirely priced in, dealers said. Large buys from foreign banks for offshore investors after the rate cut likely led to a jump in prices after a muted opening hour.

"This is most likely short covering or fear of missing out from someone who went light into the FOMC decision," a dealer at a primary dealership said.

In addition to foreign banks, state-owned banks and mutual funds were likely buying bonds after lightening their portfolios heading into the US policy outcome, wary that the FOMC would only cut rates by 25 bps, dealers said. Traders are confident of gilt prices rising further in the coming days due to increased inflows from a wider interest rate differential with the US, as well as positive demand-supply dynamics in Oct-Mar. 

Bond prices fell at the opening trade due to a rise in US Treasury yields overnight after comments from US Federal Reserve Chair Jerome Powell suggested the torrid pace. After buying gilts heading into the decision, private banks were likely booking profit after the jump in prices, dealers said. The yield on the 10-year benchmark US Treasury note rose to 3.73% today from 3.61% at the time the Indian market closed Tuesday. Domestic money markets were shut for Id-e-Milad on Wednesday.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 564.55 bln rupees, against 114.90 bln rupees at 1030 IST on Tuesday. (Siddhi Chauhan and Aaryan Khanna)

India Gilts: Seen dn as US ylds rise after Fed's aggressive rate cut

MUMBAI – Government bond prices are seen opening lower as US Treasury yields rose on fears of price pressures re-emerging after the US Federal Open Market Committee late on Wednesday cut the federal funds target range by 50 basis points to 4.75-5.00% at its September meeting, dealers said. 

The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.76-6.81% today, against 6.78% on Tuesday. Domestic money markets were shut on Wednesday for Id-e-Milad.

The yield on the 10-year benchmark US Treasury note rose to 3.73% today from 3.61% at the time the Indian market closed Tuesday. 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 yield on the 10-year Treasury note rose Wednesday despite the FOMC opting to begin its rate cuts on an aggressive note. Prior to the policy, Fed funds futures showed a 65% probability of a 50-bps rate cut, according to the CME FedWatch took.

"The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance," the US Federal Reserve said in its policy statement. "The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate."

However, there was no solid reasoning for opting for a sharp rate cut to a more modest 25 bps cut, dealers said. Eleven of the 12 FOMC members voted for the 50-bps cut in interest rates, while Michelle Bowman voted for a more modest 25-bps cut. US Federal Reserve Chair Jerome Powell also said that sharp rate cuts should not be seen as a regular feature of the current rate easing cycle. The US rate-setting panel would continue to be data-dependent on making the call for a change in rates, he said at the post-FOMC press conference.

Updated dot plot projections suggest another 50-bps of cuts in 2024, though there were seven Fed officials who saw no more 25-bps of further rate cuts. The projections also showed 100 bps of policy easing in 2025 to 3.25-3.50%, suggesting a 200-bps rate cut in total over the next 15 months.

Many foreign banks, who had already priced in a 50-bps rate cut, may step up purchases because of the inclusion of Indian bonds in the JP Morgan Index, a 10-month process that started on Jun 28. They may also do so due to a wider interest rate differential, dealers said. Domestic traders may also step up purchases as the 10-year gilt yield tops 6.82%, a level seen as lucrative. Over the course of the next few weeks, bond yields are still expected to fall due to positive supply-demand dynamics in Oct-Mar, dealers said. (Siddhi Chauhan)

End

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

With inputs from Pallavi Singhal

Edited by Deepshikha Bhardwaj

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