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Informist, Tuesday, Oct. 15, 2024

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended higher, following a fall in crude oil prices after investor worries of an escalation in the West Asia crisis eased, dealers said. A slight fall in US Treasury yields also aided gilt prices. The offshore cues offset the impact of higher-than-expected September CPI inflation.

The 10-year benchmark 7.10%, 2034 bond closed at INR 102.29, or 6.77% yield, against INR 102.19, or 6.78% yield, Friday. Gilt prices were volatile in early trade, falling at the open and then reversing losses. After trading in a thin band with a slightly positive bias through the day, prices ended near the day's high as traders covered short bets, dealers said.

Brent crude for December delivery fell to a low of $73.34 a barrel intraday, the lowest in two weeks, after hitting $80 a barrel last week. The contract was down nearly 4% from Monday's settlement to $74.31 a barrel at the end of Indian market hours. Traders had feared a supply shock in oil due to rising tensions in West Asia. However, media reports Tuesday suggested Israel would not target Iranian oil production facilities in retaliation for an attack on its soil in early October. Moreover, the Organization of the Petroleum Exporting Countries Monday lowered its demand outlook for this year and 2025 due to concerns about demand from China.

"It's like shadow-trading, we need some cue to follow, to base our moves on, so yes, we are tracking global cues," a dealer at a private bank said. 

In addition to crude oil prices tumbling, US Treasury yields fell ahead of three US Federal Reserve members speaking Tuesday, as well as key jobs and retail sales data Thursday. The yield on the 10-year US Treasury note fell 3 basis points from 1700 IST on Monday to 4.08% at the end of Indian market hours, after hitting highs last seen in July. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors.

Bond prices followed US yields after two weeks of remaining somewhat aloof, though some traders still expect foreign portfolio investors to not be aggressive buyers of gilts as the 10-year US yield remained above 4.00%. The Monetary Policy Committee meeting and its stance change last week, coupled with other domestic cues such as the government's buyback announcements and India CPI data for September had somewhat outweighed international cues recently, dealers said. 

Gilt prices settled higher despite India's consumer inflation in September topping expectations and dimming hopes of a December repo rate cut in India. In data released post market hours Monday, headline CPI inflation was 5.5%, against expectations of 5.1% in an Informist poll. Most traders had expected bonds to decline Tuesday, before the sharp fall in crude oil moved bond prices up.

Now, bets on rate cuts have largely shifted to February from December. This sentiment translated to short-term bonds underperforming long-term gilts. Traders picked up papers maturing in 7-10 years after selling bonds of 5-year or lower tenures, causing the gilt yield curve to flatten between these maturities, dealers said.

Similar sentiment was felt in the overnight indexed swaps market as a rise in short-term swaps was seen. The six-month swap rate rose to the day's high of 6.56%, up from Monday's close of 6.51%. However, a fall in longer swap rates, such as the five-year swap rate, after steadily rising the past week, also gave positive cues to gilts, dealers said. The five-year swap closed at 6.15%, after largely trading above this rate over the past two days.

Mutual funds and foreign banks were likely buyers during the day, while state-owned banks were likely sellers. Foreign banks were the largest net sellers Monday, and likely covered short bets today, dealers said. The rise in US Treasury yields and depreciation of the rupee had deterred foreign investors from purchasing gilts over the past week. A slight improvement in both factors would have spurred foreign banks to pick up gilts on Tuesday. 

"Last week we saw foreign outflows, because of interest rate differentials, so now since US yields have softened, foreign banks would've picked up bonds," a dealer at a private bank said.

According to RBI's Negotiated Dealing System-Order Matching platform, volumes were at INR 498.65 billion compared to INR 387.45 billion on Monday. Four trades worth INR 200 million were settled under the wholesale digital rupee pilot on Tuesday, the same as on Monday.

OUTLOOK

Wednesday, bonds are seen opening higher as dealers expect a further fall in crude oil prices, dealers said. Traders will also look at the overnight movement of US yields.

Speeches of three Federal Reserve officials – namely Adriana Kugler, Raphael Bostic and Mary Daly – may lend cues to traders' views on the US rate trajectory, dealers said. US retail sales data for September and weekly unemployment claims, due post market hours on Thursday, may also impact US yields.

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, dealers said. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.75-6.83% on Wednesday.

India Gilts: Up more as Brent crude falls further to 2-wk low, US ylds slip

MUMBAI--1625 IST--Prices of government bonds rose further as crude oil prices dropped more on a muted outlook for demand and with ebbing fears of supply shocks, dealers said. Gains were limited as traders sold bonds at a profit.

Brent crude for December delivery fell to a low of $73.34 a barrel intraday, the lowest in two weeks. The Organization of the Petroleum Exporting Countries Monday lowered its demand outlook for this year and 2025 due to concerns about demand from China. Media reports suggested Israel would not target Iranian oil production facilities amid the ongoing tensions in West Asia.

Some private banks likely bought gilts during the day, while state-owned banks were likely on the selling side. Bond prices also rose as the yield on the 10-year US Treasury note fell to 4.07%, down 3 basis points from 1700 IST Monday, which may have led some foreign banks and foreign portfolio investors to buy gilts, dealers said.

However, as long as the 10-year US Treasury yield remains above 4.0%, FPI inflows may be moderate, dealers said. Overseas investors were also cautious ahead of US retail sales data and weekly unemployment claims, both due Thursday, which are likely to provide cues to US yields. 

"Traders are currently watchful on any further news coming in on Israel and Iran. The fall in crude is currently leading to a rise in (gilt) prices," a dealer at a private bank said. "But I think without any other cues and more importantly, as long as US (Treasury) yields remain up, (gilts) we won't see a sharp rise."

Foreign banks were top net sellers on Monday, and may be covering short bets after the release of India's CPI data for September, dealers said. Some traders expect a fall in prices near the end of trade, the same as Monday.

Retail inflation was an unpleasant surprise at 5.49%, against 5.1% seen in Informist poll. While gilt prices did not take a hit due to the overseas cues, rate cut expectations in December have moderated, dealers said. The October inflation data along with the Jul-Sept GDP data are now the most crucial cues on a rate cut before the Monetary Policy Committee next meets on Dec. 4-6.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 432.85 billion, against INR 334.15 billion at 1635 IST on Monday. For the rest of the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.76-6.80%.  (Srijita Bose)

India Gilts: Tad up; profit booking limits gains post crude oil price fall

MUMBAI--1330 IST--Prices of government bonds gave up some gains as traders booked profits. However, prices remained up due to a sharp fall in crude oil prices, dealers said.

The fall in crude oil prices came after media reports of Israel agreeing on attacks on Iranian military sites, instead of oil and nuclear facilities. Following the reports, Brent crude oil futures for December fell below $75-a-barrel level, after trading above that threshold for more than a week, and were down nearly 4% from Monday's settlement. In early October, Iran sent around 200 ballistic missiles into Israel, with the latter promising retaliation. This caused fears of an escalating crisis in West Asia, which could have cut oil supply.

As gilt prices rose in a somewhat unexpected manner after a poor CPI inflation print, traders sold bonds at a profit. Purchases likely from foreign and private banks prevented gilt prices from falling, dealers said. Foreign banks were the largest net sellers on Monday, according to data from the Clearing Corp. of India Ltd.

Demand for state bonds at the auction Tuesday was robust, which also led to some additional demand from gilts as some traders missed out on state bonds at the auction, dealers said. The cut-off yield on Gujarat's three-year bond was set at 6.82%, 2 basis points lower than seen at an Informist poll, likely due to demand from state-owned banks. These banks wanted to replenish their portfolios after tendering short-term bonds to the government at the buyback last week, with another scheduled on Thursday, they said.

On Monday, traders had placed short bets ahead of India's CPI data for September which was due post market hours. India's CPI rose 5.5% on year in September, against an Informist poll estimate of 5.1%. Gilts traders expected a reading between 4.8-5.2%, and the reading was expected to cause a fall in gilt prices at Tuesday's open.

"Once an event gets over, traders start short-covering. Now that the (inflation) data is out, people would have been waiting to buy," a trader at a primary dealership said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 250.65 billion, against INR 222.20 billion at 1330 IST on Monday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.77-6.83%. (Cassandra Carvalho)

India Gilts: Tad up; crude prices fall, offset impact of higher-than-view CPI

MUMBAI--1011 IST--Prices of government bonds were a tad up as concerns around crude oil supply eased following reports Israel would hit Iran's military targets, not nuclear and oil facilities, dealers said. With geopolitical tensions in West Asia possibly a major factor in any delay in rate cuts, the impact of higher-than-expected consumer inflation in September was offset by the news, dealers said. 

"The market was expecting a lower opening today (Tuesday) but the news of Israel not attacking Iran's oil refineries has offset the other sentiments," a dealer at a primary dealership said. "Because of this positive news, the selling pressure is not too strong as traders are not willing to sell at these levels."

On Monday, crude oil futures fell around 2% after the Organization of the Petroleum Exporting Countries lowered its demand outlook for this year and 2025 due to concerns about demand from China. Oil prices fell further Tuesday after Israeli media reported Prime Minister Benjamin Netanyahu had told US officials he was willing to strike military targets in Iran. Traders had feared Israel would attack Iran's oil production facilities, which could see crude oil prices shooting to near $90 a barrel. Instead, Brent crude for December delivery fell to $75.15 a barrel after topping $80 a barrel last week.

The fall in crude oil prices did away with the negative sentiment in the market after CPI inflation in September topped consensus estimates. India's CPI data for September rose to a nine-month high of 5.49% in September, against the 5.1% expected in an Informist poll. For Jul-Sept, CPI inflation averaged 4.2%, against the RBI's latest projection of 4.1%. While the inflation reading was seen delaying the expected repo rate cut by the Monetary Policy Committee in December, traders did not immediately dump bonds due to the optimism on West Asia, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 119.35 billion, against INR 109.05 billion at 1030 IST on Monday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.77-6.83%. (Siddhi Chauhan)

India Gilts:Seen dn; higher than view India CPI reduces odds of Dec rate cut

MUMBAI – Prices of government bonds are seen opening lower after higher than expected domestic CPI inflation for September reduced the chances of a rate cut in December, dealers said. The losses may be limited as state-owned banks may step up purchases if the yield on the 7.10%, 2034 bond touches 6.80%, a level considered lucrative, dealers said. 

The yield on the 10-year benchmark 7.10%, 2034 gilt is seen at 6.77-6.83% Tuesday, against 6.78% on Monday.  

India's CPI inflation rose to a nine-month high of 5.49% in September from 3.65% in August, data released by the National Statistical Office on Monday showed. The rise in headline inflation was mainly on account of the statistical effect of a low base and a sequential rise in food prices. For Jul-Sept, CPI inflation averaged 4.2%, against the RBI's latest projection of 4.1%.

With this, traders said the odds of a rate cut in December had been reduced. The Reserve Bank of India's Monetary Policy Committee last week softened its policy stance to 'neutral' from 'withdrawal of accommodation', but there was no guarantee it would follow that up with a rate cut, dealers said. CPI inflation in October is also expected to be near 5%, and that will be the last inflation print before the December MPC meeting.

In a poll by Informist, 20 of the 25 economists said they expected the Monetary Policy Committee to lower the repo rate at the Dec. 4-6 meeting from 6.50%. The other five economists saw the first rate cut being announced in February. However, higher than expected CPI inflation has resulted in the market postponing its expectation of a December rate cut, dealers said. 

Kotak Mahindra Bank pushed back its rate cut call to February from December after the inflation print, while several others, including Emkay Securities and Societe Generale, said that the odds had reduced dramatically unless there was relief in October's inflation print.

Eight states will raise INR 130.50 billion worth of bonds at 1030-1130 IST at an auction, which is expected to sail through, dealers said. Intraday movement in US Treasury yields may also lend cues. The yield on the 10-year US note was little changed overnight at 4.09%. (Siddhi Chauhan)

End

US$1 = INR 84.04

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

Edited by Deepshikha Bhardwaj

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