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Informist, Thursday, Nov. 28, 2024

By Cassandra Carvalho and Siddhi Chauhan

MUMBAI – Prices of government bonds ended slightly higher owing to an overnight fall in US Treasury yields, but gave up some gains as traders placed short bets to make room for the fresh supply of gilts at the INR 300-billion auction Friday, dealers said.

The 10-year benchmark 6.79%, 2034 bond ended at INR 99.89, or 6.80% yield, against INR 99.83, or 6.81% yield, Wednesday. The 7.10%, 2034 bond closed at INR 101.81, or 6.83% yield, against INR 101.76, or 6.84% yield, Wednesday.

US yields eased after GDP and inflation data in the US, released Wednesday, were on expected lines. The fall in US yields brought in foreign inflows in the early part of the trading session, pushing bond prices up, dealers said. Dealers also picked up bonds on expectations of a Jul-Sept GDP print in India that would be weaker than the Reserve Bank of India's projection of 7%. The India growth data are due in market hours Friday, at 1600 IST.

The yield on the 10-year US Treasury note settled at 4.26% on Wednesday, from 4.28% at 1700 IST. There were no intraday cues from US yields as the US markets are shut for Thanksgiving. The 10-year US yield has fallen over 20 basis points from highs earlier in November.

The softening in US yields brought in active foreign investors who preferred short-term bonds as short-tenure paper is expected to outperform other tenures in the face of a likely rate-cut cycle. Bets on that cycle beginning sooner than later have begun to be placed ahead of India's GDP release, dealers said. Passive foreign inflows also boosted prices, as the weight of Indian gilts will increase to 6% in the JP Morgan Emerging Market Bond Index at the end of the month.

"There are passive flows, the active ones are going for short (tenure) bonds because they tend to look at higher coupons, and also in a rate-cut scenario, short-term bonds are better because of the curve steepening, and the fear of US tariffs is still there, so they are avoiding longer terms (bonds)," a trader at a primary dealership said.

RETURN OF FPI

Foreign investors were lapping up shorter-tenure gilts, as the risk of holding "duration paper" loomed large ahead of a Donald Trump presidency beginning January, dealers said. This week, the Republican president-elect said he would impose 25% tariffs on Mexican and Canadian imports, and an additional 10% on Chinese imports. Trump's economic policies, if implemented, are seen as inflationary, at a time when the US Federal Open Market Committee has just begun its rate-cutting cycle. 

Expectations of lower GDP growth made Indian gilts all the more lucrative for foreign investors, as a lower reading could hasten a rate cut by the RBI's Monetary Policy Committee. Following news of Trump choosing the "market-friendly" Scott Bessent to be his Treasury secretary, US yields began softening, drawing foreign inflows into the Indian market, dealers said.

After being hefty net sellers earlier in November, to the tune of over INR 100 billion, foreign portfolio investors have bought INR 23.04 billion worth of fully accessible route gilts this week, according to data from the Clearing Corp. of India at 1915 IST. Most of these purchases were in bonds maturing between 2029 and 2031, which are seen as lucrative investment vehicles, with some of the liquid papers also seen gaining more if India's growth slows, dealers said.

"The seven-year bond is currently trading above the current 10-year benchmark paper (in yield terms), so obviously, if a rate cut is expected in February, this bond will be in demand," another dealer at a primary dealership said. "The bond is not that good for trading, but for investment it is a lucrative deal."

Some foreign investors were also switching out their holdings of the 7.10%, 2034 bond and buying the new 10-year benchmark 6.79%, 2034 gilt, dealers said. The presence of corporate entities and foreign banks in the market pushed up trade volumes. According to the Clearing Corp. of India data, gilts worth INR 66.36 billion were bought and INR 48.32 billion worth of gilts were sold Wednesday under Constituent Deals, and similar volumes were likely traded Thursday, dealers said.

DOMESTIC CONSIDERATIONS

The government will sell INR 100 billion of the 7.02%, 2031 bond, INR 50 billion of a new 2034 green bond, and INR 150 billion of the 7.34%, 2064 bond on Friday. Primary dealerships trimmed their gilt holdings ahead of the auction, while state-owned and private banks took out profits on prior purchases of bonds, dealers said.

The seven-year paper will be the likely target of domestic banks, as it suits their asset-liability management. Despite the interest from foreign investors, the size of the fresh supply will likely ensure domestic banks also get the 2031 bond at a discount at the auction on Friday, dealers said.

Some traders sold the 7.34%, 2064 bond on Thursday, in hopes of picking up the paper at a cheaper price at the auction. As for the new 10-year sovereign green bond, some dealers expect the RBI to reject bids at the auction due to lack of interest in the paper. However, the majority said the RBI may look to persuade state-owned entities to pick up the bond as the government's cash balance has shrunk. Moreover, the demand for these bonds may be slightly more than the previous tranche offered in Apr-Sept as these are eligible under the fully accessible route, dealers said.

"After GDP we'll have some idea of what the December MPC (Monetary Policy Committee) meeting will hold, the news of the RBI's (probable) open market operations most likely won't eventualise," a dealer at a state-owned bank said. "If liquidity is still in deficit and GDP prints low, then we expect policy to reduce the cash reserve ratio as a starting step before rate cuts."

According to the RBI's Negotiated Dealing System-Order Matching platform, the market turnover was INR 355.65 billion, against INR 307.60 billion Wednesday. No trades were settled using the wholesale digital rupee pilot Thursday, same as Wednesday.

OUTLOOK

On Friday, bond prices are likely to open steady ahead of the GDP growth print and weekly bond sale during market hours. While some traders may place short bets, volumes are likely to be muted until 1600 IST, after which the growth data will lend the market direction, dealers said. 

Any escalation of the conflict in West Asia or in eastern Europe may negatively impact gilt prices at the market opening. The movement of US yields and crude oil prices could also lend cues to bond prices.

The yield on the 6.79%, 2034 bond is seen at 6.75-6.85% Friday. The yield on the 7.10%, 2034 bond is seen at 6.78-6.88%.

India Gilts: Off highs as traders place short bets before bond auction Fri

MUMBAI--1633 IST--Prices of government bonds were off highs as traders booked profits and placed short bets before the weekly auction on Friday. Caution before India's Jul-Sept GDP data, due Friday, also capped gains, dealers said.    

Primary dealerships were likely placing short bets to make room for the weekly gilt auction, dealers said. The government will sell INR 100 billion of the 7.02%, 2031 bond, INR 50 billion of a new 2034 green bond and INR 150 billion of the 7.34%, 2064 bond. Some dealers also said the news of Russia's attack on Ukraine's energy centres caused share prices to fall in the Indian equity market and dampened the demand for bonds as well.

"Yes, primary dealers are shorting before the auction, but I feel foreign banks also might be selling a little because they'll get the bonds at cheaper prices tomorrow (Friday) at the auction," a trader at a primary dealership said.    

Earlier in the day, foreign inflows aided gilt prices, after US inflation and growth data came along expected lines. India's GDP data for Jul-Sept, due on Friday, is seen well below the Reserve Bank of India's 7% projection. Traders said intraday bets on Friday would be more lucrative as they would not have to use the Clearcorp Repo Order Matching System to place an overnight bet ahead of the data release.

Dealers said that the presence of corporate entities in the market kept volumes up, and that large state-owned players had entered the overnight indexed swap market as well. According to the Clearing Corp. of India data, gilts worth INR 66.36 billion were bought and INR 48.32 billion worth of gilts were sold on Wednesday under Constituent Deals, and similar volumes were likely traded on Thursday, dealers said.

Some dealers said the RBI could also buy bonds in the open market after the first week of December to shore up flagging liquidity in the banking system. The liquidity deficit on Wednesday was INR 308.48 billion. Others expected the central bank to cut the cash reserve ratio by 50 basis points to 4% at the monetary policy review next week to shore up system liquidity, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 322.70 billion, against INR 254.85 billion at 1630 IST on Wednesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.78-6.84%, and on the 7.10%, 2034 bond is seen at 6.81-6.87%.  (Cassandra Carvalho)

India Gilts: Remain up on short-covering ahead of India GDP, foreign inflows 

MUMBAI--1332 IST--Prices of government bonds remained up as traders covered short bets before India's Jul-Sept GDP data, due 1600 IST on Friday, dealers said. Dealers speculated that foreign portfolio investors were covering short bets placed earlier in the month. 

Traders covered their short bets as they expected India's Jul-Sept GDP growth to fall to as low as 6.4%, against the Reserve Bank of India's forecast of 7%. This bolstered dealers' views on the onset of a rate cut cycle by the Monetary Policy Committee. The MPC will meet from Dec. 4-6, and the September quarter GDP reading will likely be the last significant data point before the meet. 

After being net sellers for most of November as global uncertainties weighed on emerging markets, dealers said that foreign investors were returning to the Indian gilt market as US yields softened. While the rupee depreciated after some recovery earlier in the week, dealers said that the Indian currency remained the least affected compared to other emerging markets, making Indian gilts appealing to foreign investors. FPIs bought INR 15.86 billion of fully accessible bonds on Wednesday alone, according to Clearing Corp. of India data. 

"There is continuous buying from FPIs because of the short-rally, global rates have fallen, in Australia, in South Korea also (there was a) surprise rate cut. So FPIs are back in the (gilt) market," a dealer at a private bank said.

US yields fell overnight as US inflation and GDP data were in line with expectations. The ceasefire deal between Israel and Iran-backed militant group Hezbollah also aided risk-on sentiment, which weighed on yields. The rise in bond prices was also aided by domestic entities receiving overnight indexed swap rates, dealers said. While foreign investors bought gilts, state-owned banks were on the selling side, dealers said.

"PSU banks are on the selling side to book profits, because their trading books are very heavy as they've been supporting the market whenever there's been a huge correction," a dealer at a state-owned bank said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 221.55 billion, against INR 109.30 billion at 1330 IST Wednesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.78-6.84%, and that on the 7.10%, 2034 bond is seen at 6.81-6.87%.  (Cassandra Carvalho)

India Gilts: Up as US yields fall; mkt cautious before India Jul-Sept GDP data

MUMBAI--1000 IST--Prices of government bonds were up due to an overnight fall in US Treasury yields. Market volumes were muted as traders refrained from placing large bets on caution ahead of India's Jul-Sept GDP data due Friday, dealers said.

"The market is reacting to the fall in US yields. The market may remain at these levels because US yields may not move significantly as US markets are shut today (Thursday)," a dealer at a primary dealership said. "Volumes will remain tepid as traders might not want to trade aggressively ahead of India's GDP data."

According to an Informist poll of 21 economists, the Indian economy likely expanded at a six-quarter low pace of 6.5%, which is well below the Monetary Policy Committee's projection of 7.0%. It is even below the 6.7% projected by the Reserve Bank of India staff's economic activity index. Some market participants even expect the domestic GDP data to fall to as low as 6.4%, dealers said. 

Market volumes, which have also been muted due to little activity from foreign banks, are expected to pick up after the release of the domestic GDP print, dealers said. Generally, foreign banks close their books towards the year-end, dealers said. 

On the global front, the yield on the 10-year benchmark US Treasury note fell to 4.26%, against 4.28% at the time of Indian market closing on Wednesday. After the activity at the open, gilt trade volumes are likely to stagnate during the day with the US market shut on account of Thanksgiving, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 34.25 billion, against 17.60 INR billion at 0930 IST Wednesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.78-6.84%, and that on the 7.10%, 2034 bond is seen at 6.81-6.87%.  (Siddhi Chauhan)

India Gilts: Seen tad up on fall in US yield, mkt awaits India Jul-Sept GDP

MUMBAI – Prices of government bonds are seen opening a tad higher Thursday due to an overnight fall in US Treasury yields. The market now awaits the release of India's Jul-Sept GDP data due on Friday, dealers said. 

The yield on the 6.79%, 2034 bond is seen at 6.78-6.84%, against 6.81% on Wednesday. The yield on the 7.10%, 2034 bond is seen at 6.81-6.87%, against 6.84% Wednesday.

The yield on the 10-year benchmark US Treasury note fell to 4.26% in Asian trade, against 4.28% at the time of Indian market closing on Wednesday. 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.

The yield on the benchmark 10-year US Treasury note fell as worries about US inflation temporarily eased because data released on Wednesday matched expectations. The October personal consumption expenditures price index, which is a comprehensive measure favoured by the US Federal Reserve as its primary inflation indicator, rose by 0.2% for the month and 2.3% for the year.

The data was in line with the Dow Jones consensus projection, with the annual rate exceeding the 2.1% mark seen in September. Apart from food and energy, core inflation rose by 0.3% monthly and 2.8% yearly, meeting economists' predictions. 

GDP in the US expanded 2.8% in Jul-Sept, in line with estimates. However, it was lower than the 3% reading for Apr-Jun. After the release of the data, odds of a 25 bps rate cut by the US Federal Open Market Committee in its December meeting rose to 71.7% from 53%.

A fall in US yields may prompt foreign portfolio investors to pick up gilts near the month-end, with the weightage of India's fully accessible route bonds rising to 6% on JP Morgan's Government Bond Index - Emerging Markets at the end of November. Back home, traders may pick up bonds ahead of the release of GDP data, scheduled for release on Friday, dealers said. The domestic print is expected to be as low as 6.4%, against the Reserve Bank of India's forecast of 7%, dealers said.  (Siddhi Chauhan)

End

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

Edited by Rajeev Pai

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