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Informist, Friday, Oct. 18, 2024

By Cassandra Carvalho

MUMBAI – Prices of government bonds slumped Friday after Reserve Bank of India Governor Shaktikanta Das said it would be "premature" and "risky" to cut interest rates at this stage, dealers said. The governor's comments erased all hopes of a rate cut by the Monetary Policy Committee at its next meeting in December, triggering sales by traders who had held on to rate cut hopes, dealers said. 

The 10-year benchmark 7.10%, 2034 gilt ended at INR 101.93, or 6.82% yield, against INR 102.20, or 6.78% yield, on Thursday. The benchmark yield ended at its highest level since Oct. 7.

"A rate cut at this stage will be very premature and can be very, very risky," Das said at the Bloomberg India Credit Forum on Friday. "When your inflation is 5.5%, and the next print is also expected to be high, you can't be cutting rates at that point – more so if your growth is also doing well." India's CPI inflation in September rose to a nine-month high of 5.49% from 3.65% in August.

The governor said the central bank's rate-setting panel is in a wait-and-watch mode on cutting the repo rate and will join the rate-cutting "party" of other central banks around the globe on a "durable basis". "Those who were hoping for a December rate cut would've been badly affected by his (governor Das') words... all expectations of a rate cut even in February will have to be re-thought," a dealer at a private bank said.

The comments and the re-evaluation of India's rate cut trajectory, led to a sharp fall in the last half-hour of trade. Bond prices were already lower due to an overnight rise in US Treasury yields, before recovering after the result of the INR 330-billion weekly gilt auction.

The 10-year benchmark US Treasury note rose to 4.11% by the end of Indian market hours, from 4.04% at 1700 on Thursday. US data released after Indian market hours Thursday indicated a resilient economy, putting off hopes of larger rate cuts by the Federal Open Market Committee this year.

US retail sales for September grew 0.4% on month, against 0.3% estimated by Dow Jones. Initial jobless claims in the US for the week ended Saturday were at 241,000, lower than 259,000 expected. At 1800 IST, the probability of a status quo by the US Federal Open Market Committee in November was 11%, with the majority still expecting a 25-basis-point rate cut.

Before the RBI governor's comments, bond prices were off lows after the weekly gilt auction result was on expected lines and showed investor appetite was robust after the slide in prices. This encouraged traders to pick up bonds in the secondary market, dealers said. The government sold INR 100 billion worth of the 7.02%, 2031 paper, INR 130 billion of the 7.23%, 2039 gilt, and INR 100 billion of the 7.09%, 2054 gilt.

Incremental appetite for gilts was bolstered by the government buying back nearly INR 500 billion worth of gilts over the last two weeks, including INR 249.34 billion on Thursday. State-owned and private banks deployed the cash in the seven-year bond at the auction, dealers said. Domestic banks are also keen on the bond as their requirement for High-Quality Liquidity Assets is expected to increase due to the Reserve Bank of India's proposed liquidity coverage ratio guidelines.

"Yes, the seven-year gilt saw good demand from banks because its spread between the new 10-year (6.79%, 2034) gilt will become lucrative, and also because of the draft LCR (liquidity coverage ratio) guidelines... traders started building positions after the good auction," a dealer at another private bank said.

Another reason for the auction sailing through was the build-up of short bets, which were covered at the debt sale, dealers said. The 7.23%, 2039 bond was the biggest beneficiary. The RBI set its cut-off price at INR 103.37 at the auction, down 42 paise from Tuesday's close. Life insurers and pension funds bought the 30-year bond at the expected price levels. The difference between the weighted average price and the cut-off price at the auction, or 'tail', was lower than what some traders had feared for the bond, dealers said.

According to RBI's Negotiated Dealing System-Order Matching platform, the market turnover was INR 606.45 billion, against INR 417.55 billion on Thursday. No trades were settled under the wholesale digital rupee pilot Friday, whereas six trades worth INR 300 million were settled on Thursday.

OUTLOOK

The gilt market is shut on Saturdays. On Monday, bond prices will take cues from global markets such as the movement of US yields and crude oil prices.

Spreads between state bonds and gilts are likely to compress next week after the RBI said five states will raise only INR 81 billion through bonds on Tuesday. The RBI's indicative calendar for Oct-Dec showed a borrowing amount of INR 296 billion at next week's auction.

The lower borrowing by states, though largely expected, could also help prices of long-term gilts, dealers said. The lower borrowing by states is probably on account of the Centre devolving INR 1.78 trillion to states as their share in taxes for October, double the normal monthly devolvement.

The RBI will conduct the gilt switch auction at 1030-1130 IST on Monday. The government will switch eight short-term gilts with six bonds of longer maturities. Banks may participate in the switch, and short-term bond prices may see a rise before the auction, dealers said.

Fully accessible route gilts may see passive inflows from foreign investors due to their ongoing inclusion in J.P. Morgan's Emerging Market Bond Index since June, while active FPIs may likely exit holdings in gilts due to a continued rise in US yields. 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 geopolitical developments in West Asia, dealers said. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.78-6.86% on Monday.

India Gilts: Recover some losses as auction cut-offs in line with view

MUMBAI--1515 IST--Losses in government bonds were limited and prices recovered somewhat, after traders absorbed fresh supply at cut-off prices in line with expectations, dealers said. Bond prices remained down, tracking a rise in US Treasury yields.

There were no surprises in the result of the INR 330-billion auction, with traders covering short sales from earlier this week, dealers said. Investors also picked up bonds at a bargain at the auction, after the slide in gilt prices earlier in the day. Auction cut-off prices were also within 1 paisa of the median estimates in an Informist poll of 15 dealers. 

The government sold INR 100 billion worth of the 7.02%, 2031 paper, INR 130 billion of the 7.23%, 2039 gilt, and INR 100 billion of the 7.09%, 2054 gilt. The difference between the weighted average price and the cut-off price at the auction, or 'tail', was lower than what some traders had feared. Banks deployed cash from a government buyback on Thursday to buy the 2031 gilt at the auction, dealers said. The 15-year bond saw short-covering at the auction, while life insurers and pension funds bought the 30-year bond at the expected price levels.

Gilts recovered some losses after the result, and as the 10-year US Treasury yield inching down from the day's high. The benchmark US yield fell to 4.10% from 4.12%, though it was still higher than 4.04% at the end of Indian market hours on Thursday.

"US data is what I like to call 'seasonal', they will change again when the revised numbers come out. But at this point, US is the only indicator for the market...they also have elections coming, so we are also tracking US yields closely," a dealer at a state-owned bank said. "But since the auction cut-offs were good, we haven't seen some major sell-off and kept the market in the same range."

Traders had turned more cautious on buying bonds as there are few structural reasons for prices to rise in the next three weeks, before the US presidential election on Nov. 5, dealers said. The 10-year gilt may trade in the range of 6.72-6.85% unless there is a fresh cue that suggests the Reserve Bank of India's Monetary Policy Committee will cut interest rates before or after February, when traders have already factored in a rate cut. RBI Governor Shakikanta Das is scheduled to speak at an event in Mumbai starting 1600 IST, which may lend cues in the last hour of trade.

Prices may also rise before the end of trade as some dealers expect the government to buy back another tranche of bonds next week. The RBI would announce the buyback, if any, after market hours. The government has bought back 493.87 billion worth of gilts maturing in 2025-26 (Apr-Mar) in the last two weeks.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 402.65 billion, against INR 287.10 million at 1530 IST on Thursday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.76-6.82%. (Srijita Bose)

India Gilts: Remain down; short covering may shore up bids at auction

MUMBAI--1245 IST--Prices of government bonds were sharply down, tracking a rise in US Treasury yields, with traders selling bonds fearing delays in rate cuts in India and abroad. With the sharp fall in prices, cut-off prices at the INR 330-billion weekly gilt auction may not be much lower than prevailing secondary market prices, dealers said.

The government offered to sell INR 100 billion worth of the 7.02%, 2031 paper, INR 130 billion of the 7.23%, 2039 gilt, and INR 100 billion of the 7.09%, 2054 gilt at 1030-1130 IST. Traders may cover short bets placed in the run-up to the debt sale, and some investors also consider current prices lucrative to pick up bonds at the auction, dealers said.

While the 15-year bond was expected to be poorly bid at the auction, traders may cover a large quantum of short bets at the auction. Trades worth 73.83 billion were outstanding in the 7.23%, 2039 bond on the Clearcorp Repo Order Matching System, a proxy for short sales in a bond. The bond traded at INR 103.40 at 1130 IST, down 39 paise from Tuesday's close. 

"The short covering will rescue the auction, since the market has already taken a big hit," a dealer at a foreign bank said. "It is good that the market had prepared for it through the week, that is going to stem the bleeding."   

Incremental appetite for gilts was also bolstered by the government buying back nearly INR 500 billion worth of gilts over the last two weeks, including INR 249.34 billion on Thursday. State-owned and private banks may deploy the cash in the seven-year bond at the auction, dealers said. Domestic banks are also keen on the bond as their requirement for High-Quality Liquidity Assets is expected to increase due to the Reserve Bank of India's proposed liquidity coverage ratio guidelines.

Meanwhile, the 30-year bond is likely to be picked up by life insurers and pension funds, the usual investors, dealers said. Demand from insurers for bond-forward rate agreements may be around INR 15 billion, as the rise in the five-year overnight indexed swap rates makes entering into these transactions more expensive, dealers said. The five-year OIS rate is currently 6.19%, after hitting a low of 5.92% in September.

However, foreign portfolio investors' demand was seen muted as the 10-year US Treasury yield remained well above the crucial 4.00% mark, and rose to 4.12%. Inflows from FPIs tracking global bond indices may not materialise till next week, near the end-of-month rebalancing of the J.P. Morgan emerging market index, dealers said. India's weightage on the Government Bond Index – Emerging Markets will rise to 5% on the last working Friday of October.

State-owned banks were likely buyers as the yield of the benchmark 10-year 7.10%, 2034 gilt touched the crucial 6.80% mark, dealers said. A further fall in bond prices may be limited as the auction was more firmly bid than traders initially expected. Some traders even expect the auction result to bolster prices in the latter half of the day, they said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 212.60 billion, against INR 143.85 million at 1230 IST on Thursday. During the day, the yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.76-6.82%. (Aaryan Khanna and Cassandra Carvalho)

India Gilts: Down as US ylds up post upbeat US data; bond sale result eyed

MUMBAI--1032 IST--Government bond prices fell due to an overnight rise in US Treasury yields. Uncertainty over the pace of rate cuts in the US and India led traders to trim their portfolios, dealers said.

The yield on the 10-year US Treasury note rose to 4.10%, against 4.04% at the end of Indian market hours on Thursday. US yields rose after US retail sales for September and weekly unemployment data, released Thursday, indicated the world's largest economy remained resilient. This weakened the case for rate cuts at the US Federal Open Market Committee's next meeting in November.

Traders now focus on the result of the weekly gilt auction due at 1030-1130 IST, at which the government will sell INR 100 billion of the 7.02%, 2031 bond, INR 130 billion of the 7.23%, 2039 bond, and INR 100 billion of the 7.09%, 2054 gilt.

While the seven- and 30-year papers see natural demand from investors such as banks and life insurers to match liabilities, the 2039 gilt may be poorly bid at the auction, dealers said. Dealers are likely to demand higher returns for absorbing the fresh supply.

"The auction will sail through because the short term is there. We might see a tail (low demand) in 2039 bond though," a dealer at a state-owned bank said. A tail refers to the difference between the weighted average price and the cut-off price at auction, with a larger tail signifying poor demand. 

"No one is keen to buy 15-year paper because the market is already long because of euphoria. There is a build-up of around INR 50 billion-INR 60 billion short in 15-year-paper, traders might cover it," the dealer said. The euphoria he was referring to was the expectation of upcoming rate cuts, which may now be delayed, and the expectation of demand for bonds exceeding supply in the remainder of 2024-2025 (Apr-Mar).

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 112.40 billion, against INR 57.20 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 ylds up; mkt may remain cautious before bond sale

MUMBAI – Prices of government bonds are seen opening lower due to an overnight rise in US Treasury yields. However, traders may refrain from placing aggressive bets on caution ahead of the INR 330-billion gilt auction, 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. 

US retail sales for September grew 0.4% on month, against 0.3% estimated by Dow Jones. Initial jobless claims in the US for the week ended Saturday were at 241,000. Economists polled by Reuters had forecast 260,000 claims for the latest week. Both the data points indicated that the US economy remained resilient, weakening the case for a rate cut. After the data, the probability of a status quo on rates rose to 9.8% against 6.3% a day before, with the majority still expecting a 25-bps rate cut by the US Federal Open Market Committee in November, as per the CME Fedwatch tool.

The yield on the 10-year US Treasury note rose to 4.10%, against 4.04% at the end of Indian market hours 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. 

On the domestic front, traders look forward to the weekly gilts auction. The government will sell INR 100 billion of the 7.02%, 2031 bond, INR 130 billion of the 7.23%, 2039 bond, and INR 100 billion of the 7.09%, 2054 gilt. State-owned and private banks are seen picking up the seven-year bond to match their liabilities, dealers said. The 30-year bond would see demand from life insurers and pension funds. The 15-year gilt may see the poorest bids as traders' appetite for gilts is low amid uncertainties regarding the US and India's rate cut trajectories, dealers said. Investors may demand higher yields for all bonds at the auction. (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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