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Informist, Monday, Oct. 7, 2024

 

By Siddhi Chauhan

 

MUMBAI – Prices of government bonds were down as traders trimmed bond holdings ahead of the Reserve Bank of India's Monetary Policy Commitee meet outcome on Wednesday, dealers said. An intraday rise in US yields also weighed on the prices of gilts, they said. 

 

The 10-year benchmark 7.10%, 2034 gilt ended at INR 101.72 or 6.85% yield, compared with INR 101.84 or 6.83% yield on Friday. Throughout the day, a tug of war was seen as prices swung between losses and gains, ending the session in the red, dealers said.

 

"The market was very volatile today. If you see, the day's low was INR 101.75 (price on 7.10%, 2034 bond), and then it went to INR 101.85. It is all because of positions that were held by everyone heading into MPC which were reversed due to conflict in Iran," a dealer at a private bank said. "Now many people are having sweaty pants, and they are selling ahead of that."

 

The market has been split on stance change expectations at the monetary policy meeting, which started Monday. While there are a few traders who expect the rate setting panel to change its stance from 'withdrawal of accomodation' to 'neutral', the majority are expecting a status quo on the stance and rate front, dealers said. 

 

The new external members of the MPC may not diverge from the RBI's opinion as it would be their first meeting, dealers said. All three RBI members on the panel have voted to keep the repo rate unchanged at 6.50% and the monetary policy stance restrictive. Delhi School of Economics Director Ram Singh, economist Saugata Bhattacharya, and Institute for Studies in Industrial Development Director and Chief Executive Nagesh Kumar were appointed to the MPC by the government last week. They replaced Jayanth Varma, Ashima Goyal, and Shashanka Bhide, two of whom had voted for a rate cut in August. 

 

Apart from this, an intraday rise in US Treasury yields also weighed on gilt prices. The yield on the 10-year US Treasury note ended at 4.00% at the time of Indian market closed on Monday, against 3.86% on Friday. It rose above 4% intraday for the first time since Aug. 8. 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 as the jobs data released on Friday reduced expectations of a higher interest rate cut by the US Federal Open Market Committee. As a result, Fed funds futures showed expectations of a 50-basis-point rate cut at the November meeting slumped to nil, while odds of no rate cuts re-emerged, according to the CME FedWatch tool. This came after the FOMC had begun its rate-setting cycle with a higher-than-expected 50-bp rate cut in September.

 

Traders sold bonds heavily last week, reversing bets that they had placed on policy easing, due to fears of further escalation in the West Asia conflict. Even though the possibility of further escalation in conflict was limited on Monday, it seemed difficult for the rate setting panel to ignore it, dealers said. There was no further selloff after US President Joe Biden urged Israel to explore alternatives to targeting Iranian oil facilities, which may keep the commodity's price in check.

 

"I don't think that RBI will directly say that they are changing a stance because it will result in volatility. But according to me for all practical purposes they have already changed their stance," a dealer at a state-owned bank said. "Look at the system liquidity, it is above INR 2 trillion, also they have announced a buy-back as well." Banking system liquidity hit INR 2.88 trillion on Thursday, the highest since Jul. 22, and was at 2.02 trillion on Sunday.

 

On Friday, the RBI in a press release said that the government will buy back INR 250 billion worth of five gilts maturing in 2025-26 (Apr-Mar) through an auction on Thursday. This is the first buyback of bonds since June, and the first buyback bonds maturing in subsequent years since financial year 2017-18 (Apr-Mar).

 

 

In early trade, the market was optimistic due to hope of an announcement of India's inclusion in the emerging market bond index operated by FTSE Russell this week. Late Friday, Bloomberg reported that FTSE Russell, the last major global bond index provider to not include India's bonds in emerging market indices, had a productive meeting with the Securities and Exchange Board of India on foreigners' access to the domestic bond market. However, it was soon overshadowed by a rise in US yields. 

 

The report by Bloomberg said the results of the index review were due to be announced on Tuesday. Even if Indian bonds are not included in the index, the market may not take major cues as the inflows from the same are not expected to be significant in the near term, dealers said. 

 

Meanwhile, among on-the-run gilts, the new 10-year bond, which is 6.79%, 2034 bond, was the second most traded after the current 10-year benchmark. The bond was auctioned for the first time on Friday, and has an outstanding of only INR 220 billion. This took the market by surprise, as typically, a fresh paper takes time to pick up volumes. 

 

"I was also quite shocked to see the paper pick such good volumes on the first day after being auctioned. This would have happened because traders decided to sell the bond where they were seeing fewer losses," another dealer at a private bank said.

 

The losses on the new 10-year bond were less than the 7.10%, 2034 gilt, and traders preferred selling the stock bought at auction on Tuesday to de-risk their portfolios, rather than opt to sell the 10-year benchmark, which would show a steeper loss, the dealer said.

 

The choppy trade also contributed to the day's volume, dealers said. According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 787.40 billion, against 751.80 billion on Friday. No trades were settled on Monday under the wholesale digital rupee pilot, the same as on Friday.

  

OUTLOOK

Gilts are seen opening steady on Tuesday due to caution ahead of the RBI's MPC meeting outcome on Wednesday, dealers said. While there are a few traders who expect the rate setting panel to change its stance from 'withdrawal of accomodation' to 'neutral', the majority expect status quo on the stance and rate front, dealers said. 

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. Traders may also await the INR 187-billion state-government security auction due at 1030-1130 IST to gauge demand from investors, dealers said. 

 

Traders await FTSE Russell's conclusion of its index review, reportedly due on Tuesday. If the index approves the inclusion, a significant movement is not expected as the optimism has already been factored in, dealers said. On the other hand, a negative response will also not lead to excessive selling as the inflows from the inclusion will not be significant, they said. 

 

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 6.81-6.89% on Tuesday.
 

	MONDAY		FRIDAY
	PRICE	YIELD	PRICE	YIELD
7.10%, 2034	101.7200	6.8507%	101.8375	6.8339%
7.18%, 2033	102.0700	6.8621%	102.1800	6.8457%
7.23%, 2039	103.0100	6.8983%	103.2000	6.8778%
7.04%, 2029	101.1000	6.7574%	101.1650	6.7411%
7.32%, 2030	102.5700	6.7962%	102.6100	6.7883%

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India Gilts: Prices see-saw amid rising US yields, index inclusion hopes
 

	1537 IST	PRICE HIGH	PRICE LOW	OPEN	PREVIOUS
07.10%, 2034
PRICE (rupees)	101.84	101.99	101.75	101.75	101.84
YTM (%)	6.8335	6.8124	6.8464	6.8464	6.8339

 

MUMBAI--1530 IST--Prices of government bonds see-sawed amid rising US Treasury yields and hopes of another index inclusion, spurring foreign portfolio investor flows. Prices swung from gains to losses through the day, though the gains were sharper after bond prices slumped last week, dealers said.

 

"There is no structure in the market right now," a dealer at a private bank said. "There is so much volatility in the market as there is a mixed bag of traders after last week's unprecedented fall, but I don't think it should go down any further as the MPC (Monetary Policy Committee) will come out with its review (on Wednesday)."

 

The 10-year US Treasury yield topped 4% for the first time since Aug. 8 after strong job additions for September reduced expectations of another interest rate cut by the US Federal Open Market Committee. Fed funds futures showed expectations of a 50-basis-point rate cut at the November meeting slumped to nil, while odds of no rate cuts re-emerged, according to the CME FedWatch tool. This came after the FOMC had begun its rate-setting cycle with a higher-than-expected 50-bp rate cut in September.

 

Earlier, prices of bonds rose sharply as some domestic traders bought gilts to cover their short bets ahead of the Monetary Policy Committee outcome on Wednesday, dealers said. Following the Federal Open Market Committee's interest rate cut by 50 basis points in September, many traders had upped their hopes of a stance change from 'withdrawal of accommodation' to 'neutral'.

 

Those expectations have reversed, and most traders are now of the opinion that the MPC would keep the policy status quo, especially due to rising tensions in West Asia and the appointment of three new external members to the committee. The government appointed Delhi School of Economics Director Ram Singh, economist Saugata Bhattacharya, and Institute for Studies in Industrial Development Director and Chief Executive Nagesh Kumar, to the committee last week. However, a small fraction of the market remained optimistic about the possibility of a stance change, citing lower CPI prints and the Fed's pathway for a further rate during the financial year.

 

"The market is divided into two factions right now, one who is expecting a stance change and the other who expects no change in stance," a dealer at a primary dealership said. "This has led to buying from domestic traders. Even the ones who do not expect a stance change are buying due to heavy selling in the previous sessions. No one would want to lighten their positions ahead of an important event."

 

Dealers said that private banks likely bought during the day after shedding bonds last week to the tune of INR 49.94 billion, according to Clearing Corp of India Ltd. data. They said that some state-owned banks also likely bought the 7.10%, 2034 bond as prices fell, which limited losses.

 

Bloomberg on Friday reported that FTSE Russell conducted productive meetings with the Securities and Exchange Board of India on foreign investors' access to the Indian bond market. Traders are betting that the index provider will announce India's inclusion in its emerging market debt index this week.

 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 655.45 billion, against INR 592.30 billion at 1435 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.80-6.85%. (Srijita Bose and Siddhi Chauhan)

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India Gilts: Dn as US ylds up; FTSE Russell index inclusion hope limits loss

 

	1030 IST	PRICE HIGH	PRICE LOW	OPEN	PREVIOUS
07.10%,  2034
PRICE (rupees)	101.81	101.90	101.75	101.75	101.84
YTM (%)	6.8378	6.8249	6.8464	6.8464	6.8339

 

MUMBAI--1030 IST--Prices of government bonds were slightly lower after a slew of triggers over the weekend, dealers said. The impact of a rise in US Treasury yields over the weekend was nearly offset by hopes of an announcement of India's inclusion in the emerging market bond index operated by FTSE Russell this week, following media reports.

 

Bond prices opened lower, tracking a rise in US yields. The yield on the 10-year US Treasury note rose to 3.98% from 3.86% at 1700 IST Friday. 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.

On Friday, higher-than-view US non-farm payrolls data indicated a strong economy, lowering chances of an interest cut and its quantum by the Federal Open Market Committee at its November meeting. Despite the erosion of rate cut hopes, foreign inflows are expected during the day on hopes of an announcement of India's inclusion in the emerging market bond index operated by FTSE Russell this week. Bloomberg reported that FTSE Russell conducted productive meetings with the Securities and Exchange Board of India on foreign investors' access to the Indian bond market. The possible inclusion of gilts in another global index, after J.P. Morgan and Bloomberg, is lending positive cues to gilt prices, dealers said.

 

The announcement of a bond buyback by the government also limited a fall in gilt prices, dealers said. The government will buy back INR 250 billion worth of five gilts maturing in financial year 2025-26 (Apr-Mar) through an auction Thursday. In addition to the buyback, INR 1.54 trillion worth of gilts are up for maturity in November. This will lead to significant demand to replace these gilts in banks' bond portfolios, particularly with the proposed tightening of liquidity coverage ratio norms, dealers said. 

 

"There's already a lot of liquidity in the banking system, and the Reserve Bank of India is going to add to it with the bond buyback...The government will probably use leftover funds from the first half of the (fiscal) year, which is a good sign of (prudent) government expenditure," a dealer at a state-owned bank said.

 

Traders also picked up bonds on Monday at prices considered lucrative, after the 10-year gilt yield rose seven basis points last week as the geopolitical crisis in West Asia worsened. The market has now discounted the news since there has been no further escalation in conflict, and crude oil prices also eased, dealers said. Brent crude for December delivery fell to $77.76 a barrel in Asian trade at 1040 IST from $78.77 a barrel at the end of Indian market hours on Friday.

 

As the Monetary Policy Committee meeting begins on Monday, traders are also realigning portfolios before the outcome, which will be declared on Wednesday. While expectations of a change of stance from "withdrawal of accomodation" to "neutral" withered after crude prices rose, traders expect a neutral tone in RBI Governor Shaktikanta Das' speech amid the recent outbreak in tensions.

 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 162.20 billion, against INR 144.65 billion at 1030 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.82-6.85%. (Cassandra Carvalho) 

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India Gilts: Seen down after rise in US yields, caution on MPC

 

MUMBAI/NEW DELHI – Prices of government bonds are seen opening on a mixed note. While prices of long-term bonds are likely to fall due to a sharp rise in US Treasury yields, short-term bond prices may open flat, or marginally higher, after the government's buyback announcement on Friday, dealers said.

 

The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.78-6.87% Monday, against 6.83% on Friday. Trade volumes are expected to be tepid as the Reserve Bank of India's revamped Monetary Policy Committee begins its three-day meeting Monday, but a slew of triggers may lead to some volatility, dealers said.

 

The government will buy back INR 250 billion worth of five gilts maturing in financial year 2025-26 (Apr-Mar) through an auction at 1030-1130 IST on Thursday, the RBI said in a release after market hours Friday. This is the first buyback of bonds since June, and the first time it will have an impact on the government's year-end cash balance since FY18, according to a report by the department of economic affairs.

 

The government will buy back the 7.72%, 2025 bond; the 5.22%, 2025 bond; the 8.20%, 2025 bond; the 5.15%, 2025 bond; and the 7.59%, 2026 bond at the auction. This is likely to boost demand for gilts maturing in up to five years, dealers said.

 

However, bonds maturing in 10 years and above are expected to take a beating from a sharp rise in US yields, dealers said. After robust US labour market data, the yield on the 10-year US Treasury note rose to 3.96% from 3.86% at 1700 IST Friday. Fed funds futures showed expectations of a 50-basis-point rate cut at the next Federal Open Market Committee meeting slumped to nil, against 53.3% a week ago, according to the CME FedWatch tool. Odds are now more in favour of a modest 25-bps US rate cut, with a minuscule 3.8% chance of no rate cuts at all.

 

Data on Friday showed that the non-farm payrolls were higher than expected, with a rise of 254,000 in September, against Dow Jones' estimate of 150,000. Wages grew by a higher-than-view 4% on year, while the unemployment rate fell to 4.1% in September from 4.2% in August. This may also impact any softening in policy tone from the RBI's rate-setting committee, dealers said. The six-member panel is expected to leave the policy repo rate unchanged at 6.50% on Wednesday for the tenth meeting in a row, although expectations of a change in stance to "neutral" have markedly increased.

 

Losses may be limited as traders may pick up the 10-year gilt as its yield topped 6.86%, which is seen lucrative. Optimism over another global bond index inclusion may also spur purchases of bonds by foreign banks. India's entry into J.P. Morgan's emerging market index suite in June and its scheduled entry in Bloomberg has led to foreign investors buying nearly $19 billion of fully accessible route bonds, which are eligible for the indices, since the first inclusion was announced on Sept. 21, 2023.

 

Late Friday, Bloomberg reported that FTSE Russell, the last major global bond index provider to not include India's bonds in emerging market indices, had a productive meeting with the Securities and Exchange Board of India on foreigners' access to the domestic bond market. The report also said the results of the index review will be announced on Tuesday.

 

FTSE Russell has kept India on the watchlist for index inclusion since 2021. Last month, SEBI introduced a special outreach cell for foreign portfolio investors and whole-time member Ananth Narayan said that the regulator is exploring a light-touch registration process for FPIs investing in only government securities. 

 

At its last index review on Mar. 27, FTSE Russell said India does not meet all the criteria for a Market Accessibility Rating of 1, which is the prerequisite for inclusion in the emerging market index. Impediments included the documentation for foreign portfolio investors, increased regulatory reporting, the inflexible settlement cycle and tax clearance process, it said.  (Srijita Bose and Aaryan Khanna)

 

End

 

US$1 = INR 83.9775

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

Edited by Manisha Baxla and Avishek Dutta

 

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