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Informist, Friday, Nov. 8, 2024

By Srijita Bose

MUMBAI – Prices of government bonds ended higher as traders covered short bets after a sharp fall in US Treasury yields overnight. Gains were limited as traders booked profit on their purchases from earlier this week after the 7.10%, 2034 bond rose to its highest price level in two weeks, dealers said. The result of the INR 220 billion auction was on expected lines and did not lend much direction to bond prices.

The 10-year benchmark 7.10%, 2034 bond closed at INR 101.97, or 6.81% yield Friday, against INR 101.89, or 6.82% yield on Thursday. The newer 6.79%, 2034 bond ended at INR 100.09, or 6.78% yield, against INR 99.97, or 6.79% yield on Thursday.

The yield on the 10-year benchmark US Treasury note fell to 4.31% at the end of Indian market hours Friday from 4.45% Thursday, after the US Federal Open Market Committee cut US interest rates by 25 basis points early Friday as expected. US Federal Reserve Chair Jerome Powell's comments after the rate decision were also a positive. He said Donald Trump's win in the US presidential election would have no near-term impact on the FOMC's rate decisions.

"Post (US) election and FOMC, there has been some kind of a relief, and today it looks like people are switching between the old (the 10-year benchmark, 7.10% 2034 bond) and the new 10-year (6.79%, 2034 bond), but there is also some short covering which led to rise in the market," a dealer at a private bank said. 

The 6.79%, 2034 bond gained more than the 10-year benchmark. Traders booked profit in the 7.10%, 2034 bond, which capped its price around INR 102.00. Another reason for the divergence was that the 7.10%, 2034 bond had ended slightly higher on Thursday, while the newer 2034 bond ended steady, dealers said.

Despite the short covering, likely from foreign banks, some traders also placed further short bets in the 7.10%, 2034 bond. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The most-traded 7.10%, 2034 bond had trades worth nearly INR 169 billion Friday, against 165 billion on Thursday.

Traders were comfortable holding on to these bets ahead of the India's CPI inflation print for October, due for release at 1600 IST Tuesday, dealers said. Headline consumer inflation is seen at a 14-month high of 5.9% in October by an Informist poll, just below the 6.00% top of the Reserve Bank of India's comfort band. A lower print along with a lower Jul-Sept GDP could influence the Monetary Policy Committee to cut rates as early as December, against the widely expected February.

However, if CPI inflation substantially tops 6%, rate cuts are likely to be completely off the table at the Monetary Policy Committee's next meeting, dealers said. RBI Governor Shaktikanta Das on Wednesday again pushed back against expectations of an interest rate cut next month, saying it would be wrong to assume that a change in stance by the MPC would be followed by a reduction in the repo rate at the immediate next meeting. The rate-setting panel changed its policy stance to 'neutral' from 'withdrawal of accommodation' in October.

"I think there is still some chances that MPC will cut rates in December if the inflation and the GDP data are benign. Das has just tried to dial down the excitement of the market post stance change and keep that element of surprise, he loves to do that anyway," a dealer at state-owned bank said. 

Meanwhile, at the auction, the bidding for the 7.02%, 2027 bond was expectedly aggressive, as banks sought to replace securities maturing this month with fresh stock. The RBI got bids worth INR 331.71 billion for the three-year bond, nearly five times the notified amount at auction. A bid-cover ratio of around three times is considered to show strong demand for a bond at auction. The 7.34%, 2064 bond was likely picked up by life insurers and pension funds, dealers said.

According to the RBI's Negotiated Dealing System-Order Matching platform, the market turnover was INR 495.25 billion, against INR 330.90 billion on Thursday. Two trades worth INR 100 million were settled using the wholesale digital rupee pilot on Friday, the same as Thursday.

OUTLOOK

Gilts markets are closed on Saturday. On Monday, prices of government bonds will take cues from the movement of US Treasury yields, crude oil prices and any geopolitical developments, dealers said. 

Traders may avoid large bets before the India CPI inflation data for October is published at 1600 IST Tuesday. Though the print is expected to be higher, traders will watch for the divergence from the estimated 5.9% to form a view on December rate cut scenario by the MPC, dealers said. 

The yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.78-6.85%. The yield on the 6.79%, 2034 bond is seen at 6.74-6.81%.

India Gilts: Remain up on short covering; auction result on expected lines

MUMBAI--1500 IST--Prices of government bonds remained up after the result of the INR 220-billion weekly gilt auction was along expected lines. Short sellers continued covering those bets as key US events passed and after US Treasury yields fell overnight following the US Federal Open Market Committee's rate-cut announcement, dealers said.

The bidding for the 7.02%, 2027 bond was expectedly aggressive, as banks sought to replace securities maturing this month with fresh stock. The Reserve Bank of India got bids worth INR 331.71 billion for the three-year bond, nearly five times the notified amount at auction. A bid-cover ratio of around three times is considered to show strong demand for a bond at auction.

This also led to the price in the 10-year benchmark, 7.10%, 2034 bond to go up to the day's high of INR 102.02, after which domestic banks likely sold the bond at a profit, dealers said. The 7.34%, 2064 bond was likely picked up by life insurers and pension funds. Since gains were capped in the 7.10%, 2034 gilt, traders who were betting on a further rise in prices picked up the newer 10-year 6.79%, 2034 gilt, and its price rose further, dealers said.

"Sentiments are positive today (Friday), US elections and the FOMC are done with, and overall things look good for the bond market in the medium to long term," a dealer at a primary dealership said. "It (the 10-year benchmark price) tested figure (INR 102.00) also, but I think the support was not much because in the near term there are some risks on the domestic front."

With the auction out of the way, the next trigger for the market is India's CPI inflation print for October, due to be released at 1600 IST Tuesday, dealers said. Headline consumer inflation is seen at a 14-month high of 5.9% in October, according to the median of Informist poll of 20 economists, well above the Reserve Bank of India's target of 4% and just below the 6% top of its comfort band. A lower print along with a lower Jul-Sept GDP could influence the Monetary Policy Committee to cut rates as early as December, against the widely expected February. However, if CPI inflation substantially tops 6%, rate cuts are likely to be completely off the table at the Monetary Policy Committee's next meeting, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 403.60 billion, against INR 260.50 billion at 1530 IST Thursday. During the day, the yield on the most traded 7.10%, 2034 bond is seen at 6.79-6.84%, and that on the 6.79%, 2034 bond is seen at 6.74-6.81%. (Srijita Bose)

India Gilts: Up; divergence in view on 3-year gilt cut-off at auction

MUMBAI--1218 IST--Prices of government bonds remained up after the 10-year US Treasury yield fell by 10 basis points overnight to 4.34%, dealers said. Demand at the weekly auction was seen robust, but cut-off estimates for the 7.02%, 2027 bond varied greatly.

The government offered INR 70 billion of the 7.02%, 2027 gilt at the auction. An Informist poll estimated the median cut-off price of the bond to be INR 100.67, with the range of estimates being INR 100.61-100.75. Dealers expected a firm bid-cover ratio on the paper, but there was lack of consensus on how much banks would pick up for their asset liability management. 

"I think 6.72% is the fair level for that part of the curve, other securities are also getting traded at around 6.72-6.73% yield, so my sense is that this paper will not be any different, while the market estimate is 2-3 paise higher," a trader at a primary dealership said, who pegged the cut-off price at INR 100.68.

The 2027 paper was last traded on Oct. 28, and banks tend to pick up the paper to hold it till maturity. Some dealers said they expected state-owned banks to aggressively bid on the bond. Space on banks' investment books will open up with INR 1.54 trillion worth of government securities maturing between Nov. 4-14. Uncertainty about India's rate cut cycle deterred some dealers from wanting to pick up the rate-sensitive gilt, dealers said.

For the INR 150-bln supply of the 7.34%, 2064 gilt, insurance companies and provident funds will likely pick up the bulk of the paper, and the cut-off prices should not be much lower than the secondary market level, dealers said. Dealers estimate around INR 15-25 billion worth of gilts being picked up by banks for bond-forward rate agreements with life insurers.

Traders were of the view that the lack of an auction last week contributed to demand at the debt sale, while others said that the auction was a "non-event" for the broader market since both papers were at extreme ends in terms of maturity. A low state-bond auction amount, worth INR 94.67 billion, on Tuesday also added to the demand at the gilts auction. In Oct-Dec, state borrowing has undershot the indicative calendar by about 30% so far, with bond supply lower by nearly INR 400 billion from the indicated amount.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 152.70 billion, against INR 147.15 billion at 1130 IST Thursday. During the day, the yield on the most traded 7.10%, 2034, bond is seen at 6.79-6.84%, and that on the 6.79%, 2034 bond is seen at 6.74-6.81%. (Cassandra Carvalho)

India Gilts: Up on fall in US yields; demand at weekly auction seen firm

NEW DELHI--0955 IST--Prices of government bonds rose due to a fall in US Treasury yields, leading traders to cover short bets, though gains were limited ahead of the weekly gilt auction. Traders also booked profit on their purchases from earlier this week as the 7.10%, 2034 bond rose to its highest price level in two weeks, dealers said.

This was the upper end of the current price range expected for the 10-year bond, barring further intraday cues. Prices may stagnate at these levels, as the US Federal Open Market Committee's decision to cut rates by 25 basis points was already factored in, dealers said, even as Federal Reserve Chair Jerome Powell's remarks were seen signalling rate cuts would continue, a positive for gilts. The 10-year US Treasury yield fell 12 basis points overnight to 4.33%.

"We didn't react much when they rose, and it's only around a 10-basis-point fall," a dealer at a private bank said. "We have recovered from the levels following (Donald) Trump's (US presidential election) win." Even after the fall, the benchmark US Treasury yield is up around 60 basis points since end-September, making it unlikely that foreign investment into gilts will jump immediately, dealers said.

Foreign banks likely covered short bets heading into the FOMC outcome, and were likely doing the same Friday, dealers said. However, incremental demand from foreign portfolio investors may take a hit due to the recent slide in the rupee, with depreciation against the dollar cutting into any gains made on investments in India, they said. The rupee fell to a record low of 84.3775 a dollar on Thursday, and traded around similar levels Friday. It has fallen about 0.3% against the greenback after Trump's election victory on Wednesday pushed up the dollar index to multi-month highs.

Despite this, demand at the weekly gilt auction is seen firm, especially due to a lack of fresh supply of gilts last week due to Diwali. The government will sell INR 70 billion of the 7.02%, 2027 bond and INR 150 billion of 7.34%, 2064 bond at 1030-1130 IST. Domestic banks are likely to pick up the 7.02%, 2027 bond to match their liabilities. Bidding for the 2027 bond may be aggressive as investors have cash on hand from bonds worth nearly INR 1 trillion maturing over the past 10 days, and another maturity worth around INR 650 billion coming up on Thursday, dealers said.

Meanwhile, investors are also keen to buy the 7.34%, 2064 bond at above 7.00% yield. Traders said there is likely to be firm demand from life insurers for bond-forward rate agreements at the auction, especially as the five-year overnight indexed swap rate--an input in calculating the cost of funding the agreement--fell 4 basis points Friday, dealers said.

Some traders said the impact of the auction on secondary market prices would be muted, as the two bonds on offer have different market dynamics, including investors, to the benchmark 10-year paper. They expect volatility only towards the end of the day due to the large build-up of short bets in the 7.10%, 2034 bond, as well as caution before the weekend, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 83.65 billion, against INR 99.90 billion at 1030 IST Thursday. During the day, the yield on the most-traded 7.10%, 2034 bond is seen at 6.79-6.84%, and that on the 6.79%, 2034 bond is seen at 6.74-6.81%. (Aaryan Khanna)

India Gilts: Seen up on fall in US ylds after Fed Powell's remarks post FOMC

MUMBAI – Prices of government bonds are seen opening higher as US Treasury yields fell after the Federal Open Market Committee cut the fed funds target range by 25 basis points to 4.50%-4.75% early Friday. US Federal Reserve Chair Jerome Powell said Donald Trump's win in the US presidential election would have no near-term impact on the FOMC's rate decisions.

The yield on the most-traded 7.10%, 2034 bond is seen at 6.78-6.85% Friday, against 6.82% Thursday. Meanwhile, the yield on the 6.79%, 2034 bond is seen at 6.74-6.82%, against 6.79% on Thursday.

While traders had fully priced in a 25-bps cut by the FOMC, they were awaiting Powell's comments on future rate cuts, especially after Republican Donald Trump won the election, dealers said. The general market view was that a Trump administration would see higher fiscal spending and the imposition of tariffs, which would cause inflationary pressure. The yield on the 10-year benchmark US Treasury note fell to 4.33% at 0850 IST from 4.45% at 1700 IST Thursday.

The FOMC statement said that inflation "made progress toward the committee's 2% objective but remains somewhat elevated" and that the risks to achieving the dual goal of employment and inflation were "roughly in balance". Powell said that the FOMC would consider policy decisions made by the new US government only when these are announced or implemented. Powell also said that the Fed was observing the rise in US bond yields, attributing it to views on stronger economic growth. Traders will consider these comments to recalibrate their expectations on a December rate cut in the US, dealers said.

Gains may be capped before the weekly gilt auction at 1030-1130 IST as traders trim their portfolios to pick up auction stock. The government will sell INR 70 billion of 7.02%, 2027 bond and INR 150 billion of 7.34%, 2064 bond at the auction. In addition to the easing of US yields, a liquidity surplus in the domestic market may also lead banks to buy gilts after the maturity of around INR 1 trillion of government securities in the last 10 days, dealers said. (Cassandra Carvalho)

End

US$1 = INR 84.38

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

Edited by Akul Nishant Akhoury

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