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Informist, Friday, Oct. 4, 2024

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended sharply lower due to foreign portfolio investors' likely aggressive selling due to rising geopolitical tensions in West Asia, coupled with a rise in crude oil prices. The negative sentiment was highlighted by poor bids for fresh supply at the INR 390-billion auction, which led to a further fall in prices after the result.

The 10-year benchmark 7.10%, 2034 gilt ended at INR 101.84 or 6.83% yield, compared with INR 102.24 or 6.78% on Thursday. The benchmark gilt yield closed at its highest level since Sept. 10.

The government sold INR 70 billion of the 7.02%, 2027 bond, INR 220 billion of a new 2034 paper and INR 100 billion of the 7.46%, 2073 gilt. The RBI set a coupon of 6.79% for the 2034 bond at the auction, against the median of 6.78% in an Informist poll. While the three-year bond drew firm bids, demand for the 50-year gilt was also lower than expected. 

Private and state-owned banks picked up the new 10-year gilt. Even though the bid-cover ratio for the bond was over 3 times, considered firm, traders bid for the bond at a discount, aiming to get a bargain, dealers said. The cut-off yield of the three-year paper was in line with the market's expectation, as domestic banks picked up the paper to manage their liabilities. 

Foreign investors cut large chunks of their investments in the Indian gilts market as emerging markets seemed more risky than safe haven assets such as the 10-year US Treasury note, as the conflict in West Asia worsened. Fears of the US government getting involved in the conflict added to investors' worries. 

On Tuesday, Iran launched around 200 ballistic missiles at Israel. US President Joe Biden spoke of coordinating with Israel to retaliate against Iran, while Israel continued to bomb Iran-backed militant group Hezbollah sites in Lebanon.

Crude oil prices soared as the Israel-Iran conflict raised concerns of supply disruptions should a war hit crude production facilities. This outweighed the news of the Organization of the Petroleum Exporting Countries and its allies raising their oil output from December. Brent crude for December delivery rose to $78.77 a barrel in Asian trade at 1700 IST from $75.14 a barrel at the end of Indian market hours on Thursday. A rise in crude oil prices raises fears of imported inflation in India, which imports 80% of its crude oil needs.

Key US economic data due after market hours Friday also spurred outflows from bonds. The US non-farm payrolls data for September was seen above the August reading, which may reduce the quantum and frequency of interest rate cuts by the Federal Open Market Committee this year, after its 50 basis point cut in September, dealers said.

Traders were keen to reduce the duration risk of their portfolios amid ongoing geopolitical tensions, with scope for greater losses in long-term gilts, dealers said. Long-term bond prices fall more per basis point move in yields. The 15-year benchmark 7.23%, 2039 bond fell 64 paise to INR 103.20, while the 2073 bond slipped nearly 80 paise to INR 106.50 Friday. This compared with the 40-paise fall in the 7.10%, 2034 bond.

The RBI set a cut-off yield of 6.98% on the 7.46%, 2073 bond, against an Informist estimate of 6.97%. Moreover, the gap between the weighted average price and yield of the bond – the tail – showed poor bids at the auction. Its bid-cover ratio, of 2.01 times the notified amount, was also subpar. Life insurance companies bought the majority of the 50-year bond, but the lack of sizeable bids from a state-owned life insurer at the auction led to a lower-than-expected cut-off price, dealers said.

Traders' expectations of a change of stance by the Monetary Policy Committee to "neutral" from "withdrawal of accomodation" next week withered due to the rise in crude oil prices. However, with prices plunging two days in a row, some traders are likely to pick up bonds as the three-day monetary policy review begins Monday, dealers said. 

In August, while the MPC had left the repo rate unchanged, external members Ashima Goyal and Jayanth Varma had voted to cut it by 25 bps to 6.25%. However, the reconstitution of the MPC after the end of the external members' four-year terms has seen Goyal and Varma exit the committee and seen three new experts take their place. According to economists, the new set of external members--Delhi School of Economics Director Ram Singh, economist Saugata Bhattacharya, and Institute for Studies in Industrial Development Director and Chief Executive Nagesh Kumar--are "more neutral than hawkish", with Bhattacharya expected to vote for a rate cut.

"Within a week or two, the market will move on from the panic seen this week because of the Middle-East situation (Israel-Iran conflict). Right now traders are worried about it, but MPC will definitely be back on their minds next week," a dealer at another state-owned bank said.

NEW 10-YEAR GILT

The new 6.79%, 2034 bond ended at INR 99.97, or 6.7942% yield, on Friday. The RBI accepted 186 out of 273 competitive bids for the new 10-year gilt at the auction, putting it in the hands of a majority of traders in the market, some who had picked up the gilt at a bargain. With the supply landing on their books, these traders sold the 10-year benchmark 7.10%, 2034 gilt in the secondary market, dealers said.

While the 7.10%, 2034 bond's price sank, the 6.79%, 2034 bond moved in the opposite direction, and hit the day's high of INR 100.20. Traders who didn't get allotted stock of the new 10-year bought the gilt in the secondary market, and preferred to trim their holdings of other bonds as they were sitting on sizeable profits. The 10-year benchmark gilt yield fell 11 basis points in September. 

"Whoever placed bids at the 6.79% level for the new 10-year gilt were allotted very less, so that's why the prices went up and then dropped again, because these traders bought the benchmark, while everyone else was selling," a dealer at a state-owned bank said. 

Traders do not expect to see the new paper being traded in the market frequently anytime soon due to its low outstanding of INR 220 billion. Dealers said they'll wait for the gilt's second or third auction before considering a shift from the current benchmark. The bond is next scheduled to be auctioned on Oct. 25.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 751.80 billion, against INR 672.10 billion on Thursday. No trades were settled on Friday under the wholesale digital rupee pilot, the same as on Thursday.

OUTLOOK

The gilts market is shut on Saturday. On Monday, a rise in US Treasury yields may weigh on gilt prices, following the US September employment report released after market hours today, dealers said.

The non-farm payrolls data printed higher-than-expected, showing a rise of 254,000, against estimates of 150,000. With the slower-than-expectation cooling in the labour market, the FOMC could opt for a smaller quantum of rate cuts, of 25 bps. The CME Group's FedWatch shows the likelihood of a modest 25-bps rate cut at 94.5% after the data, with only a small minority seeing a 50-bps rate cut.

Gilts may also take cues from any further developments in the crisis in west Asia, along with the movement in crude oil prices, dealers said. If the yield of the benchmark 10-year gilt reaches 6.85%, dealers expect traders to pick up bonds as it is seen lucrative.

The gilts market may see foreign fund inflows 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 yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.76-6.86% on Monday.

India Gilts: Slump more after higher-than-view coupon set for new 10-yr gilt

MUMBAI--1610 IST--Prices of government bonds fell further as the coupon on the new 10-year, 2034 gilt was set higher than the market expected, dealers said. The Reserve Bank of India set the bond's coupon at 6.79%, instead of the 6.78% seen in an Informist poll.

The government sold INR 70 billion of the 7.02%, 2027 bond, INR 220 billion of a new 2034 paper and INR 100 billion through the auction of the 7.40%, 2073 gilt at 1030-1130 IST. The RBI accepted 186 out of 273 competitive bids for the new 10-year gilt at the auction, putting it in the hands of a majority of traders in the market, some who had picked up the gilt at a bargain. With the supply landing on their books, these traders sold the 10-year benchmark 7.10%, 2034 gilt in the secondary market, dealers said.

Demand for the 7.02%, 2027 bond was on expected lines as domestic banks picked up the short-term paper to match their liabilities. Insurance companies bought the majority of the 50-year bond, but the lack of sizeable bids from a state-owned life insurer at the auction led to a lower-than-expected cut-off price. Moreover, traders were keen to reduce the duration risk of their portfolios amid ongoing geopolitical tensions and a scope of a further fall in prices. 

Traders were already wary of picking up bonds, as foreign investors exited the Indian gilts market due to fears of a larger regional conflict in West Asia. "I think everybody is cautious because this is the elephant which came into the room without knocking on the door," a trader at a primary dealership said.

Foreign portfolio investors were also likely sellers due to a rise in Brent crude futures for December delivery to near $79 a barrel, as well as on caution ahead of key US labour market data, dealers said. The US will detail non-farm payroll additions after market hours.

Private banks were likely sellers in the secondary market as their hopes of the monetary policy stance turning neutral next week, from 'withdrawal of accommodation', faded due to the rise in crude oil prices. State-owned banks were likely on the buying side, but their purchases were not enough to prevent gilt prices from falling further, the same as 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 INR 649.70 billion, against INR 603.05 billion at 1630 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.76-6.86%. (Cassandra Carvalho) 

India Gilts: Remain sharply down on West Asia woes; auction results awaited

MUMBAI--1240 IST--Government bonds remained sharply down after rising fears of a large-scale war in West Asia and crude oil supply constraints triggered outflows of foreign investment. Traders now await the result of the first gilt auction in the Oct-Mar calendar for further cues after a sharp fall in prices over the past two days, dealers said. 

Dealers said the auction will sail through, with no fears of a devolvement or rejection of bids, but bids were not robust. At the auction, the government offered to sell INR 220 billion of a new 10-year bond, INR 70 billion of 7.02%, 2027 bond and INR 100 billion of 7.46%, 2073 gilt.

"As it is, there is a lot of uncertainty that has crept in due to the fears of a full-fledged war between Iran and Israel. Domestically, too, today traders will be cautious and look at trigger points to take cues," a dealer at a primary dealership said. "If the (coupon) of the new 10-year bond is higher than expected, the yield on the current benchmark (7.10%, 2034 bond) could go to 6.82-6.83% levels also."

The new 10-year paper would be bid by investors from across the market, dealers said. However, due to a looming fear of a war, that paper has lost some demand as traders preferred to reduce duration risk. Moreover, with the significant supply, some traders placed bids aiming to pick up the new bond at a bargain. Dealers said that state-owned banks are expected to bid aggressively, while demand from private banks might be lukewarm.

The shorter-tenure paper is likely to see a higher bid-cover ratio than the 10-year paper, with demand seen from state-owned banks and mutual funds. However, cut-off price estimates diverged between market participants. An Informist poll of 16 bond dealers gave a median of INR 100.78 or 6.89% yield, with a range of INR 100.70-100.82. 

Dealers said that the 50-year paper was bid by life insurance companies and pension funds, the usual investors. A large state-owned life insurer is also expected to pick up the paper as well. Bond forward-rate agreement demand was robust, and may make up nearly 20% of the supply on offer, dealers said.

"Forward-rate agreements are going to be a positive feature of this auction, the closer we get to 7.00% (yield on the 50-year paper)," a dealer at a life insurance company said. 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 290.50 billion, against INR 262.65 billion at 1230 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 gilt, was seen within a range of 6.76-6.83%.  (Srijita Bose)

India Gilts: Dn; FPIs sell on fear of crude supply disruption amid conflict

MUMBAI--1028 IST--Prices of government bonds were sharply down because foreign portfolio investors sold bonds on fears of a rise in crude oil prices as the conflict in West Asia worsened, dealers said. Losses, however, remain limited as state-owned banks pick up bonds at lucrative yield levels, they said.

"The market will be given (fall) until the tension in the Middle East eases. Everyone right now is sitting with their fingers crossed thinking what will Israel do now," a dealer at a private bank said. "The auction will see neutral demand, the short-term paper could see better demand, but because of this war, 10-year bond may not see good demand."

The 10-year bond typically becomes the market benchmark a few weeks after its first issuance, and its coupon is likely to be 2-3 basis points lower than the 7.10%, 2034 gilt's yield in the secondary market. Uncertainty over the West Asia conflict is also expected to cap the excitement surrounding the new 2034 bond, dealers said.

At 0945 IST, Brent crude oil futures for December delivery rose to near $77.57 a barrel against $75.14 a barrel at the end of Indian market hours Thursday. Crude prices have surged over 10% from lows hit Tuesday due to escalating tensions in West Asia.

According to a news article, the Israeli military on Thursday night had warned people to evacuate communities in southern Lebanon that are outside a United Nations-declared buffer zone. This signalled that the country may increase its ground operations launched earlier this week against the Hezbollah militant group.

They also said that they had struck around 200 Hezbollah targets across Lebanon, which included weapons storage facilities and observation posts. Strikes continued overnight when a series of massive blasts rocked Beirut's southern suburbs. 

On the domestic front, private banks are also selling as the erstwhile expectation of stance change at the Reserve Bank of India's October monetary policy meeting dies down. Traders had expected a change in stance to 'neutral' from the current 'withdrawal of accommodation' by RBI's rate-setting panel at its three-day meeting that starts Monday, dealers said. These hopes faded due to the geopolitical tensions.

Despite heavy selling from some sections of the market, the losses were limited as state-owned banks picked bonds at yield levels considered lucrative, dealers said. "The level of 6.80%(yield on 7.10%, 2034 bond) seems lucrative to us because in the coming days, we don't see the yields to rise above 6.81%," a dealer at a state-owned bank said. "This is because all this negativity will soon be reversed as the situation cools off."

Traders now await the INR 390-billion gilt auction at 1030-1130 IST.  The government has 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 the 7.02%, 2027 bond, and INR 100 billion of the 7.46%, 2073 gilt.

The West Asia conflict uncertainty is also expected to cap the excitement surrounding the new 2034 bond, dealers said. The 2027 bond is expected to see better demand compared to the other two papers as banks may pick the bond for their asset liability requirements, dealers said. Mutual funds may also pick the bond to deploy funds, dealers said. 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 117.30 billion, against INR 132.00 billion at 1030 IST on Thursday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.76-6.82. (Siddhi Chauhan) 

India Gilts: Seen dn as US yld, crude oil rise; mkt awaits weekly gilt sale

MUMBAI – Prices of government bonds are seen opening a tad down due to an overnight rise in crude oil prices and US Treasury yields. However, traders may refrain from placing aggressive bets ahead of the INR 390-billion gilt auction at 1030-1130 IST, dealers said.  The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.76-6.82% Friday, against 6.78% on Thursday. 

At 0754 IST, the yield on the 10-year US Treasury note was at 3.84%, against 3.80% at the end of Indian market close on Thursday. 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.

US yields rose ahead of key non-farm payrolls data for September, which is seen as crucial for interest rate decisions in the world's largest economy, dealers said. ADP private payrolls were higher than expected for September. However, US weekly initial unemployment claims also came in slightly higher than consensus, painting a mixed picture of the US labour market.

A rise in crude oil prices may also weigh on gilt prices, dealers said. At 0805 IST, Brent crude oil futures for December delivery rose to near $77.66 a barrel against $75.14 a barrel at the end of Indian market hours on Thursday. Crude prices have surged over 10% from lows hit Tuesday due to escalating tensions in West Asia, sparking concerns that global crude supplies may be threatened. The market is on edge, fearing that Israel might target Iran's oil infrastructure, which could give rise to retaliation from Iran. This fear led many foreign investors to exit emerging markets like India on Thursday, dealers said.  

On the domestic front, traders look forward to the weekly gilts auction. The government has 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 the 7.02%, 2027 bond, and INR 100 billion of the 7.46%, 2073 gilt.

The auction is expected to sail through with the new 10-year paper seeing demand from every segment, dealers said. The 2027 bond is expected to be picked up by state-owned banks and private banks for their asset liability management purposes, while the longer end will see demand from life insurers and pension funds, dealers said. (Siddhi Chauhan)

End

US$1 = INR 83.97

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

Edited by Vidhi Verma

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