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Informist, Tuesday, Nov. 5, 2024

 

By Siddhi Chauhan and Aaryan Khanna

MUMBAI/NEW DELHI – Government bond yields are expected to end November little changed from the levels at the start of the month. However, they may be buffeted by offshore and domestic triggers that result in volatility in the market from the first week onwards.

 

This week itself sees two crucial events: the US elections for Congress and president, and the US Federal Open Market Committee's meeting outcome. After dealing with these, the domestic CPI inflation print on Nov. 12 could lend a trigger to gilt prices, and the GDP growth estimate for Jul-Sept will be closely watched at the end of the month.

 

According to the median of estimates from 15 money managers, treasury heads, and economists polled by Informist, the yield on the 10-year 6.79%, 2034 bond is seen at 6.80% at the end of November. In October, the yield on the 7.10%, 2034 bond--the prevailing benchmark--had risen by 10 basis points to 6.85%. The newer 6.79%, 2034 bond, which is set to become the 10-year benchmark from this month, ended October at 6.81% yield and was at 6.79% yield on Tuesday.

 

The centre stage has been taken by the US elections. Democrat Kamala Harris, the vice-president, and Republican Donald Trump, former president, have been favoured at different times in media polls, but the race appeared to be in a dead heat on the eve of the polls. As for the FOMC, the panel is almost unanimously expected to cut the interest rate by 25 basis points, though commentary from US Federal Reserve Chair Jerome Powell may lend further cues.

 

As late as last week, betting odds favoured Trump's return to the White House, and his expected inflationary policies drove up US Treasury yields. Since October, the yield on the 10-year US Treasury note has risen by around 60 basis points. While both the leading presidential candidates are expected to prove fiscally expansionary, Trump's policies are expected to exert greater pressure on inflation. This could result in the rise in US yields being sustained, eventually pushing up domestic yields in India, though by a smaller magnitude.

 

"The market has been anticipating more fiscal loosening in case of a Trump victory, along with inflationary policies such as increased tariffs and changes in immigration policies," Rahul Bhuskute, chief investment officer at Bharti AXA Life Insurance, said. "While some of this is already factored in, a red (Republican) sweep in the US can keep the momentum in favour of rising yields. On the other hand, if Harris wins, we will witness yields cooling off."

 

This binary is reflected in some of the estimates from poll respondents. South Indian Bank and Industrial and Commercial Bank of China see the 10-year gilt yield north of 6.90% by November-end, pushed up by a Trump win and higher risk premiums attached to emerging market bonds such as India's. On the other hand, UCO Bank sees India's government security benchmark at 6.68% by month-end as US yields ease off.

 

"The factors that are causing the spike in yields will settle down--once the US election uncertainty passes and someone takes office, then you will see yields ease," said Alok Singh, head of treasury at CSB Bank. "Nerves will be soothed and buying will come in by the end of the month."

 

DOMESTIC DIVERGENCE

Indian bonds have been fairly immune to the tribulations abroad, at least till now. Even with domestic inflation jumping to a nine-month high of 5.49% in the interim and the RBI pushing back on the market’s expectations of an interest rate cut in December, the 10-year gilt yield has been kept in check below 6.90% by steady purchases from investors.

 

This is largely due to favourable demand-supply dynamics, which are expected to persist in the second half of the fiscal year ending March. The government's gross borrowing aim in FY25 is INR 1.4 trillion lower on year. It has also conducted buybacks worth nearly INR 500 billion, while its net Treasury bill issuance so far is a negative INR 2 trillion. Even as supply shrinks, demand has expanded through foreign portfolio investors mopping up gilts during India's inclusion in global bond indices. 

 

To add to the party, some traders still hold out the hope that the RBI's Monetary Policy Committee will cut rates by 25 basis points at its next meeting in December, if India's GDP growth prints below 7.0%, the RBI's forecast, for Jul-Sept. These traders remain a minority. India's CPI inflation for October, led by food prices, is likely to approach the upper end of the RBI's tolerance band of 6%, respondents said. This reading is especially important as it will be the last one before the rate-setting panel votes on interest rates on Dec. 4-6.

 

"Domestic factors are still favourable for India, supply is not a problem. Demand is holding up well, so bond markets still have positive domestic feelings," Upasna Bhardwaj, chief economist, Kotak Mahindra Bank, said. "But in the near term, we are expecting inflation to remain a problem because vegetable prices and food inflation are still volatile and will weigh on market sentiment."

 

Uncertainty on the monetary policy front is compounded by terms ending for two of the three RBI members on the panel after the December meeting. Governor Shaktikanta Das's second three-year term is set to end on Dec. 9, with no word yet about a reappointment or extension. Meanwhile, the search for a new deputy governor has started with authorities inviting applications by Nov. 30. Deputy Governor Michael Patra’s tenure is scheduled to end on Jan. 14.

 

The following are estimates of yield levels/range for the 10-year benchmark bond at the end of November:

 

Institution	Yield on the 10-year benchmark
Anand Rathi Global Finance	6.75-6.85%
Bharti AXA Life Insurance	6.75-6.88%
CSB Bank	6.75%
DCB Bank	6.75-6.85%
HDFC Bank	6.85%
IDFC FIRST Bank	6.80-6.85%
IndiaFirst Life Insurance	6.75%
Industrial and Commercial Bank of China	6.90-6.95%
Karur Vysya Bank	6.76%
Kotak Mahindra Bank	6.70-6.80%
LIC Mutual Fund	6.75-6.95%
PNB Gilts	6.88%
South Indian Bank	6.95%
Tata Mutual Fund	6.75-6.85%
UCO Bank	6.68%

 

End

 

Edited by Rajeev Pai

 

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Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

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