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Informist, Friday, Oct. 11, 2024

By Srijita Bose

MUMBAI - Prices of government bonds ended lower Friday as foreign portfolio investors sold bonds after the rupee plunged to a record low of 84.0700 per dollar. Uncertainty on when the Reserve Bank of India's Monetary Policy Committee will opt for rate cuts also weighed on bond prices, dealers said.

The 10-year benchmark 7.10%, 2034 bond closed at INR 102.13 or 6.79% yield against INR 102.23 or 6.78% yield on Thursday. "The fall in the rupee showed that RBI is comfortable breaching the 84/$1 tactical level, which triggered FPIs to sell," a dealer at a private bank said.

The rupee breached the psychologically crucial mark of 84 per dollar around 1140 IST, despite dollar sales by the RBI, as foreign banks persistently bought the greenback for outflows from domestic equities, dealers said. Returns on rupee-denominated investments by foreigners reduce if the rupee depreciates. Despite nearing the mark several times, the RBI's intervention had prevented the rupee dropping below 84 a dollar in recent months.

The fall in the bond prices was also due to prevailing uncertainty amongst traders on when hopes of rate cuts in India will fructify, dealers said. Ahead of the weekend, traders chose to place short bets on the uncertainty arising out of the conflict in West Asia. If the situation in the sensitive region worsens, rate cuts may be delayed as the MPC would be cautious about imported inflation arising from higher crude oil prices, dealers said.

Traders who bought bonds ahead of the MPC outcome on Wednesday were now selling gilts, trying to exit at a profit, dealers said. Most traders had expected rate cuts to begin from December, before the uncertainty set in last week due to the conflict between Israel and Iran. 

The fall in bond prices was also likely due to the lower-than-expected cut-off price on the 7.04%, 2029 bond at the gilt auction Friday, dealers said. The government sold INR 140 billion of the five-year gilt and INR 150 billion of the 7.34%, 2064 gilt. The RBI set a cut-off price of INR 101.34 for the five-year bond, against the median of INR 101.37 in an Informist poll of 14 dealers.

Towards the end of the day, traders bought bonds after the yield on the 10-year benchmark moved towards 6.80% level, which is considered a tactical level for state-owned banks to buy bonds, dealers said. Some primary dealers who had placed short bets ahead of the auction also bought the 10-year paper after the auction.

Bond prices were up in the early hours as US Treasury yields fell overnight, with the 10-year US yield down 4 basis points to 4.07%. Fears of no rate cut at the next US Federal Open Market Committee's meeting faded after the latest labour market and inflation data were released after market hours on Thursday. The CME FedWatch tool currently shows 84.3% possibility of a 25 basis point rate cut, up from 80.3% a day ago, while the rest are betting on a status quo at the November meeting.

The initial unemployment claims for the week ended Saturday rose to 258,000, about 33,000 higher than estimated. On the other hand, US headline CPI rose 0.2% on month in September, while core CPI--which excludes food and energy costs--rose 0.3% on month. Both figures matched the rise seen in August but were marginally higher than those estimated by Dow Jones.

Traders are watchful about India CPI data for September due post market hours on Monday, dealers said. India's headline CPI inflation rate is likely to have risen to 5.1% last month from 3.65% in August because of an unfavourable base, according to an Informist poll of 17 economists.

"If the data comes near 5.25% it won't be a worry because the (RBI) Governor (Shaktikanta Das) has already prepared the ground by saying that the print would be higher for this time," a dealer at a private bank said. Dealers, however, said bond prices may be volatile if the inflation for September is outside the 4.8-5.2% band.

Trade volumes were lower than usual due to fall in activity of foreign banks amid the geopolitical tensions, dealers said. According to RBI's Negotiated Dealing System-Order Matching platform, volumes were at INR 531.40 billion compared to INR 750.50 billion on Oct. 4 and INR 856.45 billion on Sept. 27. On Thursday, the market-wide turnover was INR 623.50 billion. No trades were settled Friday under the wholesale digital rupee pilot, the same as on Thursday.

OUTLOOK

Gilts are not traded on Saturday. On Monday, bonds are seen opening steady ahead of India CPI data for September, which will be released at 1730 IST, dealers said. Gilts may also take cues from movement in US Treasury yields and prices of crude oil.

RBI Governor Das Wednesday said the near-term risks to inflation remain high and that there is a possibility of a higher print in September due to an adverse base effect. Bond prices may rise if the reading is below 5%. Dealers said the October CPI print will also be important in lending cues for a potential December rate cut by the MPC.

The gilt market may see foreign fund inflows because of the inclusion of Indian bonds in J.P. 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.

Gilts may also take cues from any further developments in West Asia, dealers said. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.74-6.83% on Monday.

India Gilts: Fall on FX outflows, poor cut-off prices at gilts auction

MUMBAI--1505 IST--Government bond prices fell after the rupee slumped to a record low of 84.0700 per dollar. Foreign portfolio investors likely sold Indian assets, including bonds, as they hit stop-losses on their rupee holdings, dealers said.

Another likely reason for the fall was the lower-than-expected cut-off price on the 7.04%, 2029 bond at the gilt auction Friday, dealers said. The government sold 140 billion of the 2029 gilt and 150 billion of the 7.34%, 2064 gilt. The Reserve Bank of India set a cut-off price of INR 101.34 for the five-year bond, against the median of INR 101.37 in an Informist poll of 14 dealers.

The lower demand and less aggressive bidding at the auction showed that the appetite in the market was tepid. Traders were anxious after the poor bidding, as they had expected short-term bonds to be in favour after the Monetary Policy Committee softened its policy stance to 'neutral' this week, dealers said.

"Going into the weekend, I think the appetite in the market has reduced a bit, especially since geopolitical tensions and the policy stance change failed to give a direction to the market," a dealer at a state-owned bank said. "But the trigger right now was the rupee hitting an all-time low."

The rupee breached the psychologically crucial mark of 84/$ around 1140 IST, despite dollar sales by the RBI, as foreign banks persistently bought the greenback for outflows from domestic equities, dealers said. This is likely to have led some foreign portfolio investors to trim their holdings of government securities, dealers said.

Dealers also said that traders who bought bonds ahead of the RBI's MPC outcome on Wednesday were now selling as there was no clear direction in the market on rate cut expectations. The risk of delay in rate cuts also persisted due to the conflict in West Asia, dealers said. Some sections of the market had expected rate cuts to begin from December.

As for the next potential trigger on the domestic front, traders will closely watch the release of India's CPI data for September, after market hours on Monday, dealers said. India's headline CPI inflation rate is likely to have risen to 5.1% in September from 3.65% in August, driven by an unfavourable base, according to an Informist poll of 17 economists. Traders said a print around 5% is being priced into gilts, after RBI Governor Shaktikanta Das warned of such a reading on Wednesday. They said that it would only impact bond prices if India's inflation in September is out of the 4.8-5.2% band.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 352.35 billion, against INR 447.05 billion at 1530 IST on Thursday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.74-6.82%.  (Srijita Bose)

India Gilts: Give up gains; auction demand seen mixed post bidding

MUMBAI--1215 IST--Prices of government bonds gave up gains after bidding for the weekly gilt auction ended. Demand at the INR 290-billion auction was seen mixed, dealers said.

The government offered to sell 140 billion of the 7.04%, 2029 gilt and 150 billion of the 7.34%, 2064 gilt at the auction at 1030-1130 IST. Demand for the five-year gilt was firm, buoyed by replacement demand from banks after selling 244.53 billion worth of short-term gilts to the government on Thursday. A chunk of the paper will be picked up for asset-liability management needs, dealers said. Demand for the long-term gilt seemed lacklustre, which had also pulled down prices of bonds maturing in 30-50 years in the secondary market, they said.

"Traders want a risk premium to hold bonds right now, because the situation in West Asia is still very active," a dealer at a private bank said. "Oil prices are still elevated, so I don't think there is comfort in bring down the yield to 6.75% for now." Brent crude for December delivery traded around $79 a barrel, after touching $70 a barrel last week before the flare-up of tensions between Israel and Iran.

Traders expect a bull-steepening in the government bond yield curve after the Reserve Bank of India's Monetary Policy Committee was seen opening the door to rate cuts by changing its stance to 'neutral' on Wednesday. Discretionary investors like mutual funds are now moving to three-five year bonds, rather than those of longer durations, dealers said. The 40-year bond would see the usual demand from life insurers and pension funds, but not other sections of the market, they said.

"Foreign banks will start going out of the market as the US election and the end of year nears after making money through the year," a dealer at a life insurance firm said. "In such a situation, it's just the investor class which is left in the market, and they will take the bond up at market prices or below." The US presidential election is scheduled on Nov. 5.

Bond prices were earlier up as US Treasury yields fell overnight, with the 10-year US yield down 4 basis points to 4.07%. Fears of no rate cuts at the next US Federal Open Market Committee's meeting faded after the latest labour market and inflation data were released after market hours on Thursday.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 204.40 billion, against INR 294.55 billion at 1230 IST on Thursday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.74-6.82%. (Aaryan Khanna)

India Gilts: Tad up on fall in US ylds; bond auction at 1030-1130 IST eyed 

MUMBAI--0929 IST--Prices of government bonds were a tad up due to an overnight fall in US Treasury yields. However, traders refrained from placing aggressive bets ahead of the weekly gilts auction scheduled at 1030-1130 IST, dealers said.

The yield on the 10-year US Treasury note fell to 4.07% from 4.10% at the time the Indian market closed on Thursday. The yields on the 10-year benchmark US Treasury note fell slightly after the data points released post market hours on Thursday reaffirmed hopes of a modest rate cut by the US Federal Open Market Committee in November.

At the auction, the government will sell INR 140 billion worth of 7.04%, 2029 gilt and INR 150 billion worth of 7.34%, 2064 gilt. The demand for the 2029 bond is seen firm as state-owned banks and private banks are expected to bid aggressively for the five-year paper for their asset liability management, dealers said. Mutual funds are also expected to deploy funds aggressively as redemption pressures from earlier in the month are over, dealers said. 

However, the 2064 may not see good demand in comparison with the shorter-tenure bond. "There is a possibility of tail in the longer-end because we are currently seeing a bull steepening," a dealer at a private bank said. "At this time, shorter-tenure bonds are more lucrative as returns on these paper are more attractive." A bull steepening of the yield curve refers to short-term bond yields falling quicker than those of long-term bonds. The long-term bond is expected to see demand from the usual participants, that is pension funds and insurance companies, dealers said. 

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 34.60 billion, against INR 56.85 billion at 0930 IST on Thursday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.74-6.82%. (Siddhi Chauhan)

India Gilts: Seen steady on caution ahead of bond sale; US yld fall may aid

MUMBAI – Prices of government bonds are seen opening steady on caution ahead of the INR 290-billion gilt auction, scheduled at 1030-1130 IST, dealers said. An overnight fall in US Treasury yields may aid gilt prices. The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.74-6.82% Friday, against 6.78% on Thursday.  

At the auction, the government will sell INR 140 billion worth of 7.04%, 2029 gilt and INR 150 billion worth of 7.34%, 2064 gilt. The demand at the auction would be firm after the Reserve Bank of India's Monetary Policy Committee unanimously changed its stance to 'neutral' from 'withdrawal of accommodation' on Wednesday, dealers said.

The 2029 bond is expected to see firm demand as state-owned banks, private banks and mutual funds are expected to bid aggressively at the auction. However, the 2064 bond is expected to see moderate demand from the usual long-term investors, that is, insurance companies and pension funds, dealers said. 

The overnight fall in US Treasury yields may also aid auction demand, and push up bond prices before bidding begins, dealers said. The yield on the 10-year US Treasury note fell to 4.07% from 4.10% at the time the Indian market closed on Thursday. A fall in US yields widens the interest rate differential between haven assets and emerging market debt, making the latter more appealing to foreign investors.

The initial unemployment claims for the week ended Saturday rose to 258,000, higher than 230,000 claims estimated by Dow Jones. On the other hand, inflation data showed US headline CPI rose 0.2% on month in September, while core CPI--which excludes food and energy costs--rose 0.3% on month. Both figures matched the rise seen in August but were marginally higher than those estimated by Dow Jones. On an annual basis, headline CPI fell to 2.4% in September from 2.5% in August, and was the lowest reading since February 2021. 

The data points reaffirmed hopes of a modest rate cut by the US Federal Open Market Committee in November. The odds of no rate cuts shrank to 15.6% from 19.7% a day ago, while chances of a 25-basis-point rate cut increased to 84.4% as compared to 80.3% a day before, data from the CME FedWatch Tool showed. (Siddhi Chauhan)

End

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

Edited by Ashish Shirke

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