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Informist, Tuesday, Oct. 1, 2024

By Cassandra Carvalho

MUMBAI – Government bond prices ended higher Tuesday as traders bet on a softening in policy stance to "neutral" by the Monetary Policy Committee at its meeting next week. An intraday fall in US Treasury yields and crude oil prices, coupled with strong demand at the state bond auction, aided the rise in prices, dealers said.

The 10-year benchmark 7.10%, 2034 gilt closed at INR 102.54 or 6.73% on Tuesday, against INR 102.43 or 6.75% Monday.

India's Monetary Policy Committee will meet on Oct. 7-9 to decide on the policy repo rate and stance. After the Federal Open Market Committee cut US rates by 50 basis points in September, traders expect the Reserve Bank of India to start with a change in stance to "neutral" this month and a rate cut in December. The MPC has kept the "withdrawal of accommodation" stance unchanged since June 2022. 

Traders expect the list of external members of the MPC to be announced later in the day. Three members of the six-member panel are chosen from outside the RBI for a term of four years. The current external members are Jayanth Varma, Ashima Goyal and Shashanka Bhide, and their tenure ends on Friday. Two of the sitting external members, Goyal and Varma, had voted for a 25 basis point rate cut in the August meeting, against the majority of the panel who preferred to keep rates unchanged.

An intraday fall in US yields spurred foreign inflows, which triggered a rise in bond prices later in the day, dealers said. The yield on the 10-year US Treasury note fell to 3.75% at 1700 IST, from 3.79% when the domestic market opened Tuesday. 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 rise in bond prices prompted private banks to cover their short bets and pick up bonds, after being net sellers since Wednesday.

"Since the quarter-end closure of trading books for balance sheet disclosures, private banks looked to establish new positions, which is why they're on the buying side right now," a dealer at a state-owned bank said.

Mutual funds also purchased bonds due to inflows into debt schemes, while state-owned banks were likely sellers, dealers said. Since the gilt market is shut Wednesday for Gandhi Jayanti, the market was eager to take advantage of the price movement, dealers said. 

A fall in crude oil prices intraday had also aided bond prices. Brent crude for December delivery slipped below the crucial $70 per barrel mark during trade, due to stronger supply expectations for December with views of lower demand after China's economic slowdown caused a fall in crude prices.

"Now that the yield (of the 10-year benchmark) has fallen below 6.74%, traders are covering their short bets. Breaking the 6.74% (level) is what the market was waiting for," a trader at a primary dealership said.

Early in the day, bond prices had fallen slightly tracking an overnight rise in US yields. Late Monday, Fed's Powell said the US central bank will cut rates "over time", suggesting a preference for 25 bps rate cuts in 2024. Powell's speech tempered down traders' expectations of a 50 bps cut at the FOMC meeting in November, causing US yields to rise. At 2015 IST, the CME FedWatch tool showed that Fed fund futures reflected a 63% probability of a 25 bps rate cut at the meeting in November.

Bonds recovered most losses as traders picked up the 7.10%, 2034 gilt when its yield was above 6.75%, with that level seen near the top of the trading range, dealers said. The 10-year gilt yield has not topped 6.77% since the US Federal Open Market Committee cut rates by 50 bps on Sept. 18. State-owned banks were likely buyers in early trade, and were selling gilts when prices rose in the latter half, following the result of the state bond auction, dealers said. 

Twelve states sold INR 199.42 billion of bonds Tuesday. Cut-off yields at the auction were in line with an Informist poll, which was seen as a positive sign of investor appetite. State-owned banks picked up the 10-year state bonds while provident funds picked up the longer-tenure papers. Bond forward-rate agreements also led to some purchases at the auction, dealers said.

Regardless, the spread between the 10-year state bond yields at auction and the benchmark 10-year gilt rose to 37-39 bps, from 32-36 bps at last week's auction. The bonds were "lapped up" at higher spreads, after planned borrowing by the states in Oct-Dec was higher than expected. In the indicative calendar for state borrowing, states said they would borrow INR 3.20 trillion in the December quarter, against the market's expectations of INR 2.8-3.1 trillion. Other than the slight rise in spreads, there will likely be no further impact on bond prices from the calendar, dealers said.

The effect of a higher-than-expected government borrowing for gilts in Oct-Mar was also largely discounted as lucrative yield levels sent the market on a buying spree, dealers said. The central government retained its borrowing forecast of INR 14.01 trillion for 2024-25 (Apr-Mar), while traders expected a cut of INR 100-300 billion to be announced in the Oct-Mar borrowing calendar.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 736.60 billion, against INR 502.95 billion at 1700 IST on Monday. Two trades worth INR 100 million were settled under the wholesale digital rupee pilot Tuesday, same as on Monday.

OUTLOOK

India's financial markets are shut on Wednesday for Gandhi Jayanti. On Thursday, gilts may open higher as traders look forward to the MPC meeting next week. The release of the external members' list, along with key data points in India and the US, will also give cues to prices when the market opens. US jobs data, such as the September employment report and weekly unemployment insurance initial claims report, is due later this week.

"The one-day lag due to the holiday, leaves a lot for the market to take cues from, but as we approach MPC, bond prices should see gains," a trader at another primary dealership said.

Dealers may also take cues from US Purchasing Managers' Index released Tuesday. The US September ISM report on business manufacturing Purchasing Managers' Index was 47.2, lower than the Dow Jones forecast of 47.5. A reading above 50 denotes expansion in activity, while a print below 50 indicates contraction. US S&P Global manufacturing Purchasing Managers' Index was revised upward to 47.3 in the final September print against the 47.0 preliminary print. It is down from 47.9 in August, and is the lowest since June 2023. 

The market may also take cues from the movement of US Treasury yields. Foreign fund inflows are likely to continue because of the inclusion of Indian bonds in JP Morgan's emerging market bond index after the weightage was increased to 4% this month. The subsequent fall in US yields due to this change may also increase foreign inflows due to an appealing interest rate differential between the yields of US Treasury notes and Indian gilts.

The movement in crude oil prices may also affect gilt prices. Any uptick in gilt 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 6.70-6.76% on Thursday.

India Gilts: Up after state bond auction result; focus on supply, MPC members

MUMBAI/NEW DELHI--1430 IST-–Government bond prices rose after the result of the state bond auction, which showed firm demand for gilts despite higher-than-expected borrowing from states and the Centre scheduled over the next few months, dealers said.

Dealers expect bond prices to rise further this week due to increasing bets that the Monetary Policy Committee will change its stance to "neutral" from "withdrawal of accommodation" at its meeting next week, after the Federal Open Market Committee last month cut its rates by 50 basis points. Most dealers were, however, circumspect about whether the new six-member panel with the addition of three new members would go for any change at its first meeting, after nine straight meetings of status quo on the policy rate and stance.

The terms of Ashima Goyal, Jayanth Varma and Shashanka Bhide, currently external members of the MPC, are scheduled to end on Friday. The announcement of three new external members is expected after market hours Tuesday, dealers said.

"The result is a broad positive, because there doesn't seem to be any dent in appetite," a dealer at a primary dealership said. "People want to continue to add to their portfolios, and then some private banks are also positioning for the MPC decision."

Bonds recovered early losses as US Treasury yields eased intraday, dealers said. Prices had fallen due to an overnight rise in US yields after US Federal Reserve Chair Jerome Powell suggested a moderate pace of rate cuts in the rest of 2024. The yield on the 10-year US Treasury note fell to 3.76% from 3.79%.

State-owned banks were likely buyers earlier as the 7.10%, 2034 bond was offering more than 6.75% yield, with that level seen near the top of the trading range, dealers said. The 10-year gilt yield has not topped 6.77% since the US Federal Open Market Committee cut rates by 50 basis points on Sept. 18.

Meanwhile, there were not enough fresh triggers to move bond prices significantly higher, particularly amid heavy bond supply this week. Twelve states raised INR 199.42 billion through bonds Tuesday, and the Centre is set to issue INR 390 billion worth of gilts on Friday. A fresh supply of Treasury bills on Thursday, after two weeks of no supply, would also have to be absorbed by the market, dealers said.

"The mood in the market overall is to wait and watch, since there will be so much supply of bonds during the week," a dealer at a private bank said. "Right now though, the slight rise we are seeing is purely due to good yield levels." 

Dealers said that during the day, private banks and mutual funds sold in the secondary market while state-owned banks were on the buying side. Markets will be shut on Wednesday on the occasion of Gandhi Jayanti. Dealers are also awaiting US data points during the week to take cues on trading, including key jobs data on Friday.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was currently INR 438.80 billion, against INR 304.85 billion at 1430 IST on Monday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen within a range of 6.72-6.77%.  (Srijita Bose and Aaryan Khanna)

India Gilts: Tad dn as US ylds up post Powell's speech; state bond sale eyed

MUMBAI--1010 IST--Prices of government bonds were a tad down due to an overnight rise in US yields. Traders now await a state government securities auction scheduled at 1030-1130 IST, dealers said. 

The yield on the 10-year US Treasury note rose to 3.79% from 3.77% at the time the Indian market closed on Monday. US yields rose as US Federal Reserve Chair Jerome Powell said the central bank would prefer 25-basis-point interest rate cuts in 2024. His comments come two weeks after the Federal Open Market Committee began its rate cut cycle with a 50-bps rate cut.

With Powell guiding for moderate rate cuts, foreign banks are likely to have reduced their holdings of risk assets such as India's gilts, dealers said. Fed funds futures showed that the odds of a 50-bps rate cut at the US Fed's next meeting in November fell to 38.2% from 53.3% on Monday, according to the CME FedWatch tool.

"There is a possibility that foreign banks are selling after Powell's speech yesterday (Monday)," a dealer at a private bank said. "But I think that the market will remain range-bound only, it won't move much. The state bond auction is also there, the demand at the auction seems okay."

Traders await the state government securities auction to assess investor demand, dealers said. At the auction, 12 states plan to raise INR 199.42 billion through bonds. The auction is expected to sail through, but demand for fresh supply may not be as robust, dealers said. 

Some traders are expected to pick short-term bonds heading towards the monetary policy meeting on Oct. 7-9, dealers said. Bets of a policy stance change to "neutral" from "withdrawal of accommodation" by the Monetary Policy Committee next week have increased. This is after the US rate decision, and recent readings showing a moderation in domestic growth and inflation, dealers said.
 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 70.85 billion, against INR 31.85 billion at 0930 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.73-6.79%. (Siddhi Chauhan) 

India Gilts: Seen steady on lack of firm cues; state bond auction eyed

MUMBAI – Prices of government bonds are seen opening steady due to a lack of significant cues, dealers said. Traders eye investor demand at the state bond auction at 1030-1130 IST.

The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.73-6.79% Tuesday, against 6.75% on Monday. India's financial markets will be shut on Wednesday on account of Gandhi Jayanti. 

At the auction, 12 states plan to raise INR 199.42 billion through bonds. The auction is expected to sail through, but demand for fresh supply may not be as robust, dealers said. This is after both the Centre and states said they would borrow more through bonds than what the market expected in Oct-Mar and Oct-Dec, respectively.

On Monday, traders were seen placing bets on the Reserve Bank of India's Monetary Policy Committee meeting changing its stance to "neutral" from "withdrawal of accommodation". The trend is expected to continue during Tuesday, dealers said. The RBI's three-day monetary policy review is scheduled on Oct. 7-9.

Traders will firm their view as India's August core sector growth data, released on Monday, showed India's eight core industries' growth fell to (-)1.8% on year in August, the lowest since February 2021. With core sector output declining, dealers said the monetary policy committee may ease its restrictive stance to support the economy.
 

The market also awaits the announcement of the names of new external members of the RBI's Monetary Policy Committee. On Monday, news channel NDTV Profit reported that the government had finalised the names of the new external policy members and will likely announce them on Tuesday.  

In 2020, the RBI had to shift the dates of the meeting due to a delay in the confirmation of the external members. With the members reportedly finalised, dealers had more certainty that the meeting would not be delayed, as some had feared. The government had appointed Ashima Goyal, Jayanth Varma, and Shashanka Bhide as external members of the MPC in October 2020 for a period of four years, with their terms expiring on Friday. (Siddhi Chauhan)

End

US$1 = INR 83.82

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

Edited by Ashish Shirke

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