More Stories

Informist, Thursday, Oct. 3, 2024

By Srijita Bose

MUMBAI – Government bond prices ended sharply lower as hope of a monetary policy stance-change to 'neutral' at the upcoming monetary policy review meeting on Wednesday faded, dealers said. Foreign portfolio investors left emerging markets such as India as the crisis in West Asia escalated.

The 10-year benchmark 7.10%, 2034 gilt ended at INR 102.24 or 6.78% yield, compared with INR 102.54 or 6.73% on Tuesday. The benchmark yield ended at its highest since Sept. 17, rising the most in a single day since Jun. 4. India's financial markets were shut on Wednesday for Gandhi Jayanti.

Some dealers were of the view that, along with a fading view on stance change in October, the probability of a rate cut in December by the RBI Monetary Policy Committee in December also took a hit due to rising fears of the possibility of a regional war in West Asia. A rise in the 10-year US Treasury yield beyond 3.80% also pulled down bond prices, dealers said.

"I don't think that the RBI (Reserve Bank of India) will vote for any change in stance given the uncertainty around West Asia," a dealer at a private bank said. "Traders today were somewhat panic-stricken and wanted to readjust their positions in the market."

On Tuesday, Iran had fired more than 180 ballistic missiles at Israel in response to the latter killing Hezbollah leader Syyed Hassan Nasrallah in Lebanon on Saturday. The US government said it would coordinate with Israel to retaliate against the strikes. On Thursday, Israel bombed the Gaza Strip and said it would plan attacks on Iran's oil and nuclear facilities.

The commodities market was the most impacted by the news. Brent crude for December delivery topped $75.00 a barrel on Thursday, against $71.20 a barrel at the end of Indian market hours on Tuesday. This was another trigger for foreign portfolio investors to sell gilts, dealers said.

If there was no further indication of an escalation of the crisis in West Asia, traders may once again bet on the stance change to 'neutral'. The MPC has retained its current stance of "withdrawal of accommodation" since June 2022. Private banks were likely sellers, while state-owned banks remained on the buy-side as the 10-year gilt's yield topped 6.77%, which limited losses in gilts, dealers said.

At the same time, dealers said that it was unlikely that the three new external members appointed to the panel would opt for a dissenting view in their first meeting, with the three RBI members likely to maintain status quo on rates. On Tuesday, the government reconstituted the MPC with three new external members. It appointed Ram Singh, director of Delhi School of Economics, Saugata Bhattacharya, an economist, and Nagesh Kumar, director and chief executive at the Institute for Studies in Industrial Development, to the panel.

The three external members will replace Jayanth Varma, Ashima Goyal, and Shashanka Bhide in the upcoming MPC meeting starting from Monday. Goyal and Varma had voted for a 25-basis-point rate cut in the August meeting, against the majority of the panel, who had preferred to keep rates unchanged. Analysts said in notes that the new members were more neutral than hawkish, with one dissent on the status quo on rates and stance unlikely at even the upcoming meeting. 

"Market knows Bhattacharya and that he has been neither too hawkish nor dovish in his view, but we don't really know much about the other two members, so I think market is a little cautious on how the MPC with its new members will pan out," a dealer at a primary dealership said. Bhattarcharya was previously chief economist at Axis Bank. 

Dealers said that some traders also sold bonds to make room for Friday's auction where the government offered to sell INR 390 billion worth of gilts, which includes INR 220 billion of a new 10-year bond. Primary dealers were likely sellers ahead of the auction, they said. Dealers said that demand at the auction is expected to be firm with the new 10-year issuance to be picked up by the breadth of the market.

Traders also look forward to the US non-farm payroll data, due for release post market Friday. The data is expected to be a major cue on rate cuts by the Federal Open Market Committee in November. Currently, the CME Fedwatch tool shows only a 32.6% probability of a 50-bps rate cut, down from an almost even possibility of 49.3% a week earlier, while the rest still bet on the probability of a 25 bps rate cut in November. Dealers said that these incremental data points will be crucial in gauging the rate cut trajectory in India as well.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 672.10 billion, against INR 731.65 billion on Tuesday. No trades were settled on Thursday under the wholesale digital rupee pilot, compared with two trades worth INR 100 million settled Tuesday.

TREASURY BILL AUCTION

The Reserve Bank of India conducted the first Treasury bill auction of the December quarter at 1030-1130 IST, and set the cut-off yield on the 91-day T-bill below the policy repo rate for the first time since Apr. 27, 2022. At the auction on Thursday, the cut-off yield for the shortest-tenure T-bill was set at 6.4739%--the lowest in over 20 months--and below the policy repo rate of 6.50%. The last time the RBI set the cut-off below the repo rate was before the RBI's Monetary Policy Committee hiked rates by 40 basis points to 4.40% in an unscheduled meeting on May 4, 2022.

On Sept. 26, the government said its gross T-bill issuances in Oct-Dec would be INR 2.47 trillion, about INR 350-450 billion lower than market estimates. With supply low, there was robust replacement demand from banks at Thursday's auction, dealers said. The cut-off yields on 91-, 182- and 364-day T-bills were set 16-18 basis points lower than the previous auction on Sept. 11, after the central bank cancelled two auctions due on Sept. 18 and Sept. 25.

Further, dealers also expected funding rates over the next few months to ease. The banking system liquidity was also in a significant surplus, increasing demand from that segment of the market. On Wednesday, the surplus systemic liquidity widened to INR 2.13 trillion from INR 2.07 trillion on Tuesday.

OUTLOOK

On Friday, gilts may open steady ahead of the INR 390 billion gilt auction at 1030-1130 IST, dealers said. The government offered to sell INR 390 billion worth of gilts, which includes INR 220 billion of a new 10-year bond. The government will also offer INR 70 billion of 7.02%, 2027 bond and INR 100 billion of 7.46%, 2073 gilt at the same auction.

Developments in the conflict in West Asia would be closely watched and gilt prices may be sensitive to moves from foreign portfolio investors, dealers said. Traders also await the US non-farm payroll data for September to take cues on cuts in the US. The data is due after market hours on Friday.

Foreign fund inflows are unlikely to reverse substantially because of the inclusion of Indian bonds in JP Morgan's emerging market bond index after the weightage was increased to 4% in September. 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 market may also take cues from the overnight movement of US Treasury yields and crude oil prices. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.74-6.80% on Friday.

India Gilts: Slump further as hopes of softer MPC stance Wed fade

MUMBAI--1615 IST-–Government bond prices slumped further as hopes of a change in monetary policy stance to "neutral" at the monetary policy review outcome on Wednesday faded, dealers said. The Monetary Policy Committee has kept its stance at 'withdrawal of accommodation' since June 2022.

A stance change at next week's meeting may not come through given the escalating geopolitical crisis in West Asia and rise in crude oil prices, which induced traders to sell bonds, dealers said. Traders are also realigning their portfolios to brace for a war, which may lead to a sharp outflow of foreign portfolio investments from emerging market assets, including India's, dealers said. Such outflows have already begun on Thursday, dealers said.

"Expectations of a stance change at the October meeting have been reduced because of the escalation (in tension) in the Middle East (West Asia), so the ones who had bought based on this view are now selling," a dealer at a private bank said.

Dealers also said the three new external members appointed to the Monetary Policy Committee are unlikely to opt for a dissenting view in their first meeting. On Tuesday, the government reconstituted the MPC with three new external members. It appointed Ram Singh, director of Delhi School of Economics, Saugata Bhattacharya, an economist, and Nagesh Kumar, director and chief executive at the Institute for Studies in Industrial Development, to the panel. The three external members will replace Jayanth Varma, Ashima Goyal, and Shashanka Bhide in the upcoming MPC meeting starting from Monday. Goyal and Varma had voted for a 25-basis-point rate cut in the August meeting, against the majority view to keep rates unchanged.

Private banks and foreign banks likely sold bonds while state-owned banks remained on the buy-side as the 10-year gilt's yield topped 6.77%, which capped losses, dealers said. Primary dealers were also likely sellers ahead of the INR 390 billion auction of gilts on Friday, which includes INR 220 billion of a new 10-year bond, they said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 600.53 billion, against INR 653.80 billion at 1630 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.75-6.79%.  (Srijita Bose)

India Gilts: Down more as 10-yr US yld tops 3.80%, West Asia crisis worsens

MUMBAI--1335 IST--Prices of government bonds fell further after the yield on the 10-year US Treasury yield rose above 3.80% after the European market opened at 1230 IST, which led to fresh selling by foreign banks. The worsening crisis in West Asia had already triggered foreign outflows from Indian equity and money markets, dealers said.

The gilts market feared huge amounts of selling by foreign investors if a risk-off sentiment took hold, following escalation of the conflict in West Asia into a larger regional war, dealers said. The yield on the 10-year US Treasury note rose to 3.81% from 3.79% at 0900 IST.

On Tuesday, Iran had fired more than 180 ballistic missiles at Israel in response to Israel killing Hezbollah leader Syyed Hassan Nasrallah on Saturday. The US government said it would coordinate with Israel to retaliate against the strikes.  

The commodities market was the most impacted by the news. Brent crude for December delivery touched $75.00 a barrel on Thursday, against $71.20 a barrel at the end of Indian market hours on Tuesday.

However, gilt dealers were of the view the crude crisis might be temporary, as the Organization of the Petroleum Exporting Countries and its allies left their oil policy outlook unchanged at an online meeting on Wednesday. The policy involves raising oil output by 180,000 barrels per day in December, after postponing an output hike from October. Primary dealerships were likely to have been sellers along with foreign investors, while state-owned banks were likely buyers, dealers said.

"OPEC+ has said they will increase supply, demand from China is also seen slowing, so crude will recover...this is only temporary," a dealer at a private bank said. "But the geopolitical problem is definitely affecting gilts."

Meanwhile, the Reserve Bank of India set the cut-off yield on the 91-day Treasury bill below the policy repo rate for the first time since Apr. 27, 2022. This comes after the RBI cancelled INR 400 billion worth of T-bill auctions in September. The cut-off yields on 91-, 182- and 364-day T-bills were set 16-18 basis points lower than the previous auction on Sept. 11, after the central bank cancelled two auctions due on Sept. 18 and Sept. 25.

The supply cut was aided by lower-than-expected short-term borrowing by the government for Oct-Dec. The government said its gross T-bill issuance in Oct-Dec would be INR 2.47 trillion, INR 350-450 billion lower than the market's estimates. The net T-bill supply for Oct-Dec was also negative, dealers said.

In addition to the supply dynamics, dealers also anticipate a fall in funding rates over the next few months. Some traders hope for a softer policy stance by the RBI's MPC next week, and were of the view the panel would cut rates by December. Moreover, banking system liquidity was in a significant surplus, increasing demand from that segment of the market. On Wednesday, the surplus systemic liquidity widened to INR 2.13 trillion from INR 2.07 trillion on Tuesday.

Primary dealerships were also trimming their portfolios ahead of the weekly gilts auction on Friday. The auction will see the sale of the new 10-year, 2034 gilt. The new 10-year paper is not eligible for placing short bets in the secondary market. As a result, some traders bid for the paper at higher yields in the when-issued section of the RBI's Negotiated Dealing System-Order Matching platform, dealers said. The bond was last traded at 6.73% in the segment.

According to data on the RBI's NDS-OM portal, the market-wide turnover was INR 414.75 billion, against INR 324.40 billion at 1330 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.71-6.77%. (Cassandra Carvalho) 

India Gilts: Sharply down; worsening West Asia conflict triggers FPI sales

MUMBAI--1009 IST--Prices of government bonds were sharply down due to selling from foreign portfolio investors as an escalation in West Asia conflict put pressure on crude oil prices, dealers said. A rise in US yields also weighed on gilts prices, they said. 

"FPIs (foreign portfolio investors) are selling as crude has risen by almost $4 because of the conflict(West Asia)," a dealer at a private bank said. "US yields have also risen, but the main focus is on crude oil right now." 

Oil prices continued to rise on fears of escalating conflict in the West Asian region as it could threaten oil supplies from the world's top producing region. On Tuesday, Iran had fired more than 180 missiles at Israel. This was the country's response to Israel killing Hezbollah leader Syyed Hassan Nasrallah on Saturday. 
 

US news website Axios reported on Wednesday that Israel's retaliation could include targeting Iranian oil production facilities among other strategic sites. While Iran has said that its missile attacks on Israel are over, any response from Israel would be answered with widespread destruction, the report said.

Anticipating disruption in supply of crude, Brent crude for December delivery rose to near $75 a barrel. On Tuesday, the contract had briefly dipped below $70 per barrel before the conflict escalated.

A rise in US yields also weighed on gilt prices. The yield on the 10-year US Treasury note was at 3.79%, against 3.75% at the end of Indian market hours on Tuesday. India's financial markets were shut on Wednesday on account of Gandhi Jayanti. US yields rose Wednesday after economic data in the US pointed to a stable labour market.

These jitters were also seen impacting the trading volumes, dealers said. According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 108.95 billion, against INR 92.75 billion at 1030 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.71-6.77%. (Siddhi Chauhan) 

India Gilts: Seen tad dn as US yields rise; mkt awaits MPC meet due next wk

MUMBAI – Prices of government bonds are seen opening a tad down due to a rise in US Treasury yields. The market awaits the three-day Monetary Policy Committee meeting due next week, dealers said. 

The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.71-6.77% Thursday, against 6.73% on Tuesday. India's financial markets were shut on Wednesday on account of Gandhi Jayanti. 

At 0813 IST, the yield on the 10-year US Treasury note was at 3.79%, against 3.75% at the end of Indian market hours on 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.

However, inflows from foreign investors are expected to continue due to India's staggered inclusion in J.P. Morgan's emerging market bond index since Jun. 28. According to the Clearing Corp. of India, foreign banks and investors bought gilts worth INR 40.38 billion since the last two trading sessions. 

US yields rose Wednesday after economic data in the US pointed to a stable labour market while investors monitored escalating hostilities in West Asia after Iran fired missiles against Israel on Tuesday.

On Wednesday, the US September ADP national employment report was released, adding to signs that the labour market in the world's largest economy may not be cooling as fast as initially feared. Private payrolls increased by a more-than-expected 143,000 jobs in September, above the 120,000 rise estimated by economists polled by Reuters.

On the domestic front, traders await the Reserve Bank of India's Monetary Policy Committee meeting, scheduled 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 RBI to start with a change in stance to "neutral" this month and a rate cut in December. The rate-setting committee has kept the "withdrawal of accommodation" stance unchanged since June 2022. 

On Tuesday, the government named Delhi School of Economics Director Ram Singh, economist Saugata Bhattacharya, and Institute for Studies in Industrial Development Director and Chief Executive Nagesh Kumar as external members of the RBI's Monetary Policy Committee. They will hold office for a period of four years, the government said in a release. (Siddhi Chauhan)

End

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

Edited by Akul Nishant Akhoury

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2024. All rights reserved.