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Informist, Friday, Oct. 25, 2024

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended sharply down as overnight indexed swap rates rose and the weekly gilt auction result disappointed the market, dealers said. Caution setting in over the outcome of the Nov. 5 US Presidential election weighed on gilt prices, while domestically, the upcoming Diwali week kept volumes low.

The 10-year benchmark 7.10%, 2034 bond closed at INR 101.72, or 6.85% yield Friday, against INR 101.92, or 6.82% yield on Thursday. The new 10-year 6.79%, 2034 bond ended at INR 99.89, or 6.80% yield, against INR 100.07, or 6.78% yield on Wednesday. The benchmark yield neared the 6.85% level for the third time this week.

"Traders are eliminating their risk positions, trimming any excess or covering if they're too short, before the economic data next week and the US elections, and of course before the weekend," a trader at a primary dealership said. The five-year OIS rate rose 5 basis points to end at a three-month high of 6.29%.

The INR 320-billion auction was fully subscribed but the cut-off price on the 6.79%, 2034 bond was below all estimates in an Informist poll of 15 dealers. Dealers had foreseen only moderate demand, since the auction would reflect the current caution in the market. However, the low cut-off was a surprise as investors gave the 10-year bond a miss, even though it is expected to become the market's benchmark in the coming weeks. The bond's bid-cover ratio at auction, at 2.38 times, indicated poor demand.

State-owned banks, who were expected to pick up the bond at auction did not bid aggressively, and still managed to pick up INR 80 billion-INR 100 billion of the bond, dealers said. The incremental appetite from these banks has been eroded as they have picked up gilts of 10 year maturities and above in the secondary market this week, especially the 7.10%, 2034 bond when its yield neared the 6.85% yield level. Foreign banks were largely absent from the auction, also dampening the cut-off prices on the 10-year gilt on offer.

Foreign banks were likely sellers, as uncertainty over the US Presidential outcome led foreign investors to prefer safe haven assets over Indian gilts. Primary dealerships were also likely sellers as they sold stock picked up at the auction in the secondary market. Private banks were likely buyers, on behalf of a large corporate house, dealers said. "Some particular corporate buying was there, via CSGL (Constituent Subsidiary General Ledger account), that's why private banks were buying so much," a dealer at a state-owned bank said.

Investors were largely on the sidelines, especially since the festival Diwali next week would see most treasury desks poorly staffed as traders go on leave. The redemptions on state and government securities in November also made investors take a back seat as they would amp up purchases when there was more liquidity in the system, dealers said. The overnight Mumbai Interbank Offer Rate – the benchmark overnight funding cost – has been fixed at over 6.70% since Tuesday, against the repo rate of 6.50%.

Moreover, with rate cuts in India seen delayed, incremental demand for gilts is likely to stagnate until the event risks have passed, dealers said. Some relief on this account was there in the market, with no fresh gilt supply scheduled next week. High consumer inflation in September and October is likely to translate to the Monetary Policy Committee keeping the repo rate unchanged at its next meeting in December, dealers said.

According to the RBI's Negotiated Dealing System-Order Matching platform, the market turnover was INR 404.85 billion, against INR 380.80 billion Thursday. Four trades worth INR 200 million were settled using the wholesale digital rupee pilot, the same as Thursday.

OUTLOOK

The gilt market is shut on Saturday. On Monday, government bond prices may take cues from the movement in US Treasury yields and overnight swap rates, dealers said. Trade volumes are expected to be muted through the week, with Diwali scheduled on Nov. 1 and traders would be on leave during the festival season.

"I hope that US yields help, I think we can see a rally next week, since there's been so much selling pressure this week, and still everyone is short in the market," a dealer at a private bank said.

Gilts may also take cues from further movement in crude oil prices and geopolitical developments in West Asia, dealers said. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.80-6.87%, while that on the 6.79%, 2034 bond is seen at 6.77-6.83% on Monday.

India Gilts: Fall as gilt auction cut-off on 6.79%, 2034 bond disappoints

MUMBAI--1515 IST--Prices of government bonds fell as demand for the 10-year bond at the INR 320-billion auction disappointed, leading to lower-than-expected cut-off prices, dealers said. Investors remained on the sidelines, waiting for fresh cues for interest rates, keeping volumes muted.

At the auction, demand from state-owned banks was likely to have been less aggressive. Traders refrained from adding the 6.79%, 2034 bond to their portfolios amid global tensions and the US presidential election less than two weeks away, dealers said. Primary dealers were likely to have been sellers after the auction, possibly covering their short bets, they said. 

The 6.79%, 2034 bond was auctioned for the first time on Oct. 4 as a new 10-year gilt, right before the Monetary Policy Committee meeting. Dealers said the market had already run ahead of itself and was expecting a December rate cut. Traders have now realigned their portfolios to a repo rate cut earliest by February. Reserve Bank of India Governor Shakikanta Das said last week that rate cuts would be very premature and risky, after consumer inflation in September was higher than expected.

"The lower cut-off (on the 6.79%, 2034 bond) shows that the market recalibrated after Das' comments have faded December rate cut," a dealer at primary dealership said.

Continued gilt sales by foreign portfolio investors have resulted in dampened demand in the market for on-the-run gilts, dealers said. Even in the secondary market, bonds did not find aggressive bidders, despite a fall in the 10-year US Treasury yield to 4.18%.

On the other hand, the 2073 bond was well bid by life insurers at 7.00% yield, including by a state-owned life insurance company, dealers said. Pension funds also picked up the 50-year bond, while a small amount was picked up by banks for bond forward-rate agreements with insurers. 

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 233.00 billion, against INR 294.05 billion at 1530 IST on Thursday. During the day, the yield on the most traded 7.10%, 2034 bond is seen at 6.79-6.86%, and that on the 6.79%, 2034 bond is seen at 6.76-6.82%.  (Srijita Bose)

India Gilts: Auction demand seen firm due to short bets on 6.79%, 2034 bond

MUMBAI--1230 IST--Prices of government bonds were in a thin band as traders' attention was primarily on the result of the gilt auction, leaving volumes muted, dealers said. Short bets in the secondary market on the 6.79%, 2034 paper on offer had built up in the last few days, and traders would cover these bets at the auction.

Dealers aggressively placed short bets on the 2034 paper in the run-up to the auction, dealers said. The Clearcorp. Repo Order Matching system data showing total short bets on the bond in the secondary market amounting to INR 8.45 billion on Friday, whereas the bond has a current outstanding amount of INR 220 billion. Foreign banks that have been net sellers in the secondary market since Oct. 17 may also pick up the bond at the auction, as the 2034 paper is included under the fully accessible route and is likely to become the 10-year benchmark soon, dealers said.

The 2073 paper being auctioned is expected to be picked up by pension funds and life insurers, for bond forward-rate agreements, and Separate Trading of Registered Interest and Principal of Securities, dealers said. The likely presence of a large state-owned insurer would boost demand for the gilt, especially at the psychologically crucial 7% mark. The bond's cut-off yield has been below 7% in each of its last two auctions.

"No auction next week (in the Diwali week) is the only positive right now...otherwise market sentiment has been negative if you see, no data points also to provide cues," a trader at a primary dealership said.

If the auction results are on expected lines or better than expected, traders may pick up bonds after a slight fall in US Treasury yields. The 10-year US Treasury yield remained below the key 4.20% mark throughout Indian market hours. Traders have disregarded the cue ahead of the auction results and due to caution before the US presidential elections on Nov. 5.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 80.90 billion, sharply lower than INR 164.20 billion at 1230 IST on Thursday. During the day, the yield on the most traded 7.10%, 2034 bond is seen at 6.79-6.86%, and that on the 6.79%, 2034 bond is seen at 6.76-6.82%.  (Cassandra Carvalho)

India Gilts: In a thin band before auction, traders overlook ease in US ylds

MUMBAI--1035 IST--Prices of government bonds were steady before the weekly gilt auction at 1030-1130 IST, dealers said. Prices were up earlier due to a slight fall in overnight indexed swap rates.

The government will sell INR 220 billion of the 6.79%, 2034 bond and INR 100 billion of the 7.46%, 2073 bond. Despite a slight fall in US Treasury yields from three-month highs hit earlier this week, foreign investors may keep to the sidelines ahead of the US presidential election on Nov. 5, dealers said. This may keep demand moderate at the auction and allow some traders to get bonds at a bargain, they said.

"Auction is the day's main event, there is nothing else. Only if there is a sharp fall in US yields, will we see a reaction in India," a dealer at a private bank said. "Other than that today (Friday), bonds should be in a narrow range."

The 10-year US Treasury yield was at 4.19%, unchanged from the end of Indian market hours Thursday despite data showing resilience in the world's largest economy. Investors may keep to the sidelines ahead of the auction result, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 27.70 billion, against INR 75.20 billion at 1030 IST on Thursday. During the day, the yield on the most traded 7.10%, 2034 bond is seen at 6.79-6.86%, and that on the 6.79%, 2034 bond is seen at 6.76-6.82%.  (Srijita Bose)

India Gilts: May open tad up as US ylds fall, gains limited before auction

MUMBAI – Prices of government bonds are seen opening a tad higher as the 10-year US Treasury yield eased slightly below 4.20%, dealers said. The gains may be limited ahead of the weekly gilt auction at 1030-1130 IST.

The yield on the most traded 7.10%, 2034 bond is seen at 6.79-6.86% Friday, against 6.82% Thursday. The yield on the 6.79%, 2034 bond is seen at 6.76-6.82% on Friday, against 6.78% the previous day.

Some traders had not expected the US yield to sustain at this level, after easing towards the end of Indian market hours Thursday. The moderation in US yields was also a slight surprise after jobs and economic activity data released Thursday showed a resilient US economy, weakening the case for rate cuts, dealers said.

Traders will be watchful ahead of the auction where the government will sell INR 220 billion of the new 10-year 6.79%, 2034 bond and INR 100 billion of the 7.46%, 2073 bond. Demand is seen firm at the auction due to a lack of gilt supply next week, and as traders want to pick up the 10-year gilt, which is expected to become the new benchmark soon, dealers said. 

Primary dealers have short sold the bonds at auction over the last few days and may cover their bets Friday, dealers said. Traders await direction from either the auction or offshore cues for further direction on gilt prices, which have traded in a narrow band this week. (Srijita Bose)

End

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

Edited by Manisha Baxla

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