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Informist, Monday, Oct. 14, 2024

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended off highs, with traders cautious in the latter half of the day ahead of the release of India's CPI data for September after market hours, dealers said. Prices rose sharply earlier in the day reacting to the second gilt buyback announcement in two weeks. The sharp rise in prices allowed some traders to sell bonds at a profit, dealers said.

The 10-year benchmark 7.10%, 2034 bond closed at INR 102.19 or 6.78% yield against INR 102.13 or 6.79% yield on Friday. At the day's high, the bond's price hit INR 102.31.

CPI inflation was expected to rise sharply from 3.65% in August due to an unfavourable base effect. According to an Informist poll, CPI inflation was seen at 5.1% in September. With such a crucial trigger for the pace of India's rate cuts coming up, traders took the opportunity to sell bonds at a profit after prices rose in the first half of the day. The rise was due to favourable demand-supply dynamics, separated from bets on the rate view, dealers said. 

"Primary dealers would've been short selling and other traders would've sold at a profit for their intraday trades," a trader at a primary dealership said.

Some traders did expect the reading to be higher than the market's view of 4.8-5.2% and the biggest concern was inflation well above 4% may delay India's rate-cutting cycle, dealers said. RBI Governor Shaktikanta Das has guided for inflation to remain high in the near term, saying he expected both the September and October prints to be above 5%. The October CPI print would be the last one before the Monetary Policy Committee makes its next interest rate decision in December.

Dealers may also look at sequential inflationary pressures for a better gauge on the direction of monetary policy in India. Last week, the Reserve Bank of India's Monetary Policy Committee softened its policy stance to 'neutral' from 'withdrawal of accommodation'. Most traders expect a repo rate cut in December, while some expect it only in February. 

Data released after market hours showed that CPI inflation rose to a nine-month high of 5.49% in September. The rise was mainly due to the statistical effect of a high base and a sequential rise in food prices. CPI inflation for Jul-Sept averaged 4.2%, against the RBI's latest projection of 4.1%.

In the early part of the day, a further reduction in net bond supply buoyed gilt prices, dealers said. On Friday, the Reserve Bank of India said in a release that the government would buy back INR 250 billion worth of gilts which were maturing in FY26. The gilts – namely 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 – were the same bonds the government bought back last week. After strong demand seen at last week's auction, dealers expect the same on Thursday.

In the previous week, the government bought back INR 244.53 billion of the bonds, while traders had tendered offers worth INR 619.15 billion at the auction, against a notified amount of INR 250 billion. Traders now expect another buyback of a similar size later this month.

"Today (Monday), prices were up not because the market expected demand to be strong (at Thursday's buyback), but because it was a positive sentiment that the RBI is willing to add so much liquidity in the market... demand will be there as some traders will get a chance to make good money," a dealer at a private bank said. 

In May-Jun, the government bought back gilts worth INR 302.48 billion, against the notified amount of INR 2.30 trillion, all maturing in 2024-25 (Apr-Mar). The low amount of gilts bought back was because those gilts had high coupons, and traders did not want to get rid of the stock, dealers said. 

Due to the effective reduction in short-term bonds held by traders, bonds maturing in five years or lower were in favour, dealers said. The 7.04%, 2029 paper replaced the newly-issued 6.79%, 2034 paper to be the second-most traded paper Monday. The new 2034 paper has been the second-most traded paper since its issuance on Oct. 7, right after the outgoing 10-year benchmark 7.10%, 2034 bond. Short-tenure papers were already in demand as banks are shoring up their holdings of high-quality liquid assets amid the proposed tightening of liquidity coverage ratio norms, dealers said.

The 2031 floating rate bond also saw higher trade volumes, due to the diverse expectations on interest rate cuts, dealers said. Traders who believed rates would be cut this year sold floating-rate bonds to buy fixed-rate gilts, while those who felt rates would not be cut were on the buying side.

Trading volumes were limited for most of the day, as traders did not place any aggressive bets before the CPI data release. Traders also said that there was a lack of incentive to trade on offshore cues as the US market was shut on account of Columbus Day, dealers said. An overnight rise in US Treasury yields was largely disregarded by traders, particularly with foreign flows muted due to the holiday.

According to RBI's Negotiated Dealing System-Order Matching platform, volumes fell to INR 387.45 billion compared to INR 531.40 billion on Friday. Four trades worth INR 200 million were settled under the wholesale digital rupee pilot on Monday, against no trades on Friday.

OUTLOOK

On Tuesday, bonds are seen opening lower as India CPI inflation for September was above expectations, reducing chances of an interest rate cut by the MPC in December, dealers said.

The yield on the 10-year gilt may rise 2-3 basis points, but losses may be limited as state-owned banks are likely to pick up the gilt around 6.80% yield, a level considered lucrative. Some dealers also said that they had already priced in September inflation being higher than the market consensus, and may cover their short bets as prices fall.

"I think we'll see a knee-jerk reaction in the morning (at market open) but prices will stabilise (recover) later. It is a temporary fall, people will start buying at high yield levels," a trader at a primary dealership said.

Fully accessible route gilts may see foreign fund inflows due to their ongoing inclusion on J.P. Morgan's emerging market bond index since June. 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, as well as US Treasury yields and crude oil prices, dealers said. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.77-6.83% on Tuesday.

India Gilts: Gains on buyback announcement limited ahead of India Sept CPI

MUMBAI--1400 IST--Prices of government bonds remained up as the Reserve Bank of India's second gilt buyback announcement in two weeks was a positive cue for traders. Caution ahead of the CPI inflation data for September, due at 1730 IST, limited trade volumes and capped the gains, with traders booking profits as prices rose, dealers said.

The median of an Informist poll of 17 economists saw headline CPI inflation for September at 5.1%, with traders expecting a reading between 4.8% and 5.2%. While the reading itself may not be a shock, the market's biggest concern was that it would not be able to firm up hopes of a December rate cut, with inflation well above the Reserve Bank of India's 4% target, dealers said. RBI Governor Shaktikanta Das has guided for inflation to remain high in the near term, saying he expected both the September and October prints to be above 5%. The October CPI print would be the last one before the Monetary Policy Committee makes its next interest rate decision in December.

However, favourable demand-supply dynamics continued to buoy bond prices. On Friday, the RBI announced the government would buy back INR 250 billion worth of 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 on Thursday.

Last week, the government bought back INR 244.53 billion of the same bonds, against a notified amount of INR 250 billion. Some traders had expected another buyback only if the first one was not successful. In May-Jun, the government bought back gilts worth INR 302.48 billion, against the notified amount of INR 2.30 trillion, all maturing in 2024-25 (Apr-Mar).

"Traders did not expect another buyback announcement, since the quantum of the first one was quite good, so this was a surprise to the market," a dealer at a state-owned bank said.

With the net supply of bonds potentially being reduced by nearly INR 500 billion in two weeks, all of them in gilts maturing in FY25, traders preferred short-term gilts, dealers said. Another successful buyback of the same gilts may cause a supply crunch for short-term securities at a time when banks are shoring up their holdings of high-quality liquid assets amid proposed tightening of liquidity coverage ratio norms. At last week's buyback, traders had tendered INR 619.15 billion in total offers at the auction.

Yields on bonds maturing up to 2029 fell more than those of longer maturities. The five-year benchmark 7.04%, 2029 gilt was the second-most traded bond Monday, an unusual sight as with gilts of 10- and 15-year maturities are typically among the most traded.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 236.75 billion, against INR 235.60 billion at 1330 IST on Friday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.73-6.82%. (Cassandra Carvalho)

India Gilts: Up on buyback announcement; mkt awaits India Sept CPI data

MUMBAI--0959 IST--Prices of government bonds rose sharply following the Reserve Bank of India's announcement of a buyback, dealers said. However, the movement may not sustain due to caution ahead of India's CPI data for September at 1730 IST, dealers said. 
 

On Friday, the RBI announced the government would buy back INR 250 billion worth of 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. The auction will be held on Thursday.

In the previous week, the government bought back INR 244.53 billion of the same bonds. At the time, traders had tendered INR 619.15 billion in total offers at the auction. With bond supply being reduced by nearly INR 500 billion over two weeks, traders may stock up on gilts of bonds of up to five years, which may steepen the yield curve, dealers said.

"The market is positive because of the buyback announcement, there is a high probability that this auction will also see good demand," a dealer at a state-owned bank said. "These are the same bonds which were auctioned in the previous week when around INR 600 billion were offered, which indicates that still people are willing to give these bonds."

The positivity may not last long towards the second half of trade as traders may try to trim their holdings ahead of domestic CPI data, dealers said. India's headline CPI inflation 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.

Even though RBI's Governor Shaktikanta Das' comment has already prepared the market for a higher inflation print, if the data comes in higher than 5.2%, the yield on the 7.10%, 2034 bond may rise to 6.80%, dealers said. Das had said that near-term risks to inflation remain high and that there was a possibility of a higher print in September due to an adverse base effect. Bond prices may rise if the reading is below 5%.

With the focus firmly on domestic triggers, traders ignored the impact of an overnight rise in US Treasury yields, dealers said. The yield on the 10-year US Treasury note rose to 4.10% from 4.07% at the time the Indian market closed on Friday.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 101.80 billion, against INR 80.20 billion at 1030 IST on Friday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.73-6.82%. (Siddhi Chauhan)

India Gilts: Seen steady on caution ahead of India Sept CPI data due Mon

MUMBAI – Prices of government bonds are seen opening steady on caution ahead of the release of India's CPI data after market hours, dealers said. An overnight rise in US Treasury yields may weigh, which may be offset by a buyback announcement. The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.73-6.82% Monday, as against 6.79% on Friday.  

The yield on the 10-year US Treasury note rose to 4.10% from 4.07% at the time the Indian market closed on Friday. A rise in US yields narrows the interest rate differential between haven assets and emerging market debt, making the latter less appealing to foreign investors. 

Despite the rise in US yields, gilt prices may remain supported by buys from foreign banks and investors due to India's staggered inclusion in J.P. Morgan's emerging market bond index since Jun. 28. Moreover, domestic triggers are expected to be in greater focus.

On Friday, the Reserve Bank of India announced the government would buy back INR 250 billion worth of the 7.72%, 2025 bond; the 5.22%, 2025 bond; the 8.20%, 2025 bond; 5.15%, 2025 bond; and the 7.59%, 2026 bond. It bought back INR 244.53 billion last week. With bond supply being reduced by nearly INR 500 billion over two weeks, traders may stock up on gilts of bonds for up to five years, which may steepen the yield curve, dealers said.

The impact of the buyback may be limited immediately as traders await India's September inflation data, due to be released at 1730 IST. India's headline CPI inflation data 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.

Reserve Bank of India Governor Shaktikanta Das on 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 Monetary Policy Committee. (Siddhi Chauhan)

End

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

Edited by Saji George Titus

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