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Informist, Friday, Dec. 13, 2024

By Srijita Bose

MUMBAI – Government bond prices ended higher as traders covered short bets after the weekly gilt auction drew a stronger-than-expected demand. The 10-year benchmark 6.79%, 2034 bond ended at INR 100.43, or 6.73% yield, against INR 100.35, or 6.74% yield Thursday. During the first half of the day, trade volumes remained tepid as traders were worried that demand at auction could be poor, dealers said. 

"There was a slow reaction even after the auction results were out, but some foreign inflows and short covering helped the market pick up," a dealer at a private bank said. 

Traders who had placed short bets before the auction likely covered those bets by buying bonds both at the auction and in the secondary market, pushing prices up, dealers said. Primary dealers were likely on the selling side after buying at the auction. For the 2054 green bond, the Reserve Bank of India set a coupon cut-off at 6.98% without any devolvement on primary dealers. Dealers said that participation from life insurance companies was likely the reason the cut-off was marginally lower than the 6.99% expected.

Dealers were doubtful about demand at the auction, even for the 10-year benchmark gilt, as additional appetite for such bonds was flagging because treasuries already have a sizeable chunk of their portfolio in bonds maturing in 5-15 years. Demand from mutual funds and state-owned banks, however, helped the auction sail through smoothly. 

Most dealers were of the view that the new green paper might struggle to find buyers and that the Reserve Bank of India would either choose to devolve a large portion of the auction on primary dealers or reject bids that did not provide a 'greenium'. Investors generally tend to demand lower yields on green securities because such investments count towards their environmental, social and governance-related investment goals. The government's green bond offerings so far, however, have attracted only modest green premiums, as Indian investors lack incentives to price such bonds aggressively.

Gilt prices were also down as the yield on the 10-year US Treasury note rose to 4.33% from 4.30% at the time the Indian market closed on Thursday. After the auction, however, inflows from foreign portfolio investors and foreign banks led to a rise in gilt prices, dealers said. Domestic traders also picked the longer-tenure bonds as they expected a higher price appreciation before the RBI's Monetary Policy Committee starts cutting rates, they said. Traders said tight liquidity conditions along with doubts over how many rate cuts will the Federal Open Market Committee effect in 2025, kept investors on sidelines through most of the day.

"People have already priced in a 50-basis-point cut in the next year by the MPC, and there is little juice in the market right now as foreign inflows are mostly expected to be lower as they close their accounts for the year," a dealer at a primary dealership said. "But the flows that came in today led to the rise, but once global rate cut scenario clears up, our market will start rallying again."

According to the RBI's Negotiated Dealing System-Order Matching platform, the turnover for the day was INR 464.25 billion, up significantly from INR 399.10 billion Thursday. No trade was settled using the wholesale digital rupee pilot on Friday, same as Thursday. 

OUTLOOK

The gilts market will be shut Saturday. On Monday, gilts may take cues from the movement in US yields throughout the weekend. Traders are likely to track US yields given the lack of domestic cues. Traders will also be watchful ahead of FOMC's statement due early Thursday, at which they expect the FOMC to cut the benchmark rate by 25-basis-points.

Any developments in West Asia and the Russia-Ukraine war over the weekend and crude oil prices may impact gilt prices on Monday. The yield on the 6.79%, 2034 bond is seen at 6.70-6.77% Monday.

India Gilts: Reverse losses on better than expected demand at gilt auction

MUMBAI--1530 IST--Government bonds reversed early losses after better-than-expected cut-offs at the auction showed good demand for fresh supplies, dealers said. Trade volumes rose after the auction as traders covered short bets placed before the auction.

"The market is just up after the auction results, but the overall sentiment is still the same," a dealer at a private bank said. "I don't see the market go up further from here because next week's triggers from the US will be there (Federal Open Market Committee's policy statement). Plus, even if short covering is there right now, selling pressures are also there."

Traders who had placed short bets before the auction likely covered those bets by buying bonds both at the auction and in the secondary market, pushing prices up, dealers said. Primary dealers were likely on the selling side after buying at the auction. For the 2054 green bond, the Reserve Bank of India set a coupon cut-off at 6.98% without any devolvement on primary dealers. Dealers said that participation from life insurers was likely the reason the cut-off was marginally lower than the 6.99% expected.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 360.30 billion at 1530 IST, up from INR 232.20 billion on Thursday. For the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.70-6.77%. (Srijita Bose)

India Gilts: Remain down as traders await gilt auction results

MUMBAI--1230 IST--Prices of government bonds remained down as traders awaited the results of the INR 370-billion gilt auction, dealers said. Trade volumes remained tepid as traders were waiting for fresh cues to trade. 

"Demand at the auction will be mixed. People placed a lot of shorts on 10-year (6.79%, 2034 gilt) yesterday (Thursday), so they will want to cover, but many people are already heavy, so they will be less aggressive," a dealer at a primary dealership said. "There was some chatter that insurers will be there in the (new 2054) green bond but if not for them, I don't see aggressive bidding for the bond and the RBI (Reserve Bank of India) will simply devolve or cancel the auction."

Banks may demand higher returns to pick up the large supply of the 10-year benchmark paper, though some firm bids from state-owned banks and mutual funds during the auction reduced the pessimism around the auction earlier in the day, dealers said. Additional appetite for such bonds was flagging as treasuries already had a sizeable chunk of their portfolio in bonds maturing in 5-15 years.

For the new 2054 green bond, some dealers expect the presence of insurers bidding aggressively at the auction, dealers said. Most dealers were, however, of the view that the paper might struggle to find buyers and that the RBI may choose to devolve a large portion of the auction on primary dealers or reject bids that did not provide a 'greenium'. Investors tend to demand lower yields on green securities because such investments count towards their environmental, social and governance-related investment goals. However, the government's green bond offerings so far have attracted only modest green premiums, as Indian investors lack incentives to price such bonds aggressively.

The 7.09%, 2074 will likely be well-bid by life insurers, including a state-owned life insurance firm, dealers said. Demand for the bond through forward-rate agreements is seen middling as foreign banks, the usual counterparties to life insurers and underwriters of the agreement, have reduced activity near the end of the year. However, insurers were seeking to enter new agreements with banks, both foreign and domestic, due to a spurt of redemptions of prior agreements that began in September, dealers said. The fall in overnight indexed swap rates also made the route more cost-effective for investors.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 128.00 billion, against INR 124.30 billion at 1230 IST on Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.70-6.77%. (Srijita Bose)

India Gilts: Down on rise in US yields, short bets increase ahead of auction

MUMBAI--0955 IST--Government bond prices were down, tracking an overnight rise in US Treasury yields after US inflation data. Traders also placed short bets to make room for fresh supply from the INR 370-billion auction at 1030-1130 IST, dealers said.

The yield on the 10-year US Treasury note rose to 4.33% as of 0934 IST from 4.30% at the time the Indian market closed on Thursday, causing gilt prices to fall at market open. The fall in gilt prices was furthered as traders trimmed stock of the 10-year gilt to pick it up at the auction.

The government will sell INR 220 billion of the 6.79%, 2034 bond, INR 50 billion of a new 2054 green bond, and INR 100 billion of the 7.09%, 2074 bond at 1030-1130 IST. Traders expect firm demand for the paper, especially as they look to cover short bets placed since Thursday. 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 data at 0942 IST showed trades worth INR 100.75 billion in the 6.79%, 2034 gilt, up from INR 37.20 billion at around 0920 IST on Wednesday. State-owned banks are likely to pick up the gilt at its current secondary market yield of 6.75% as the level is seen lucrative, dealers said.

The 50-year bond is expected to be picked up by life insurance companies. However, dealers said the Reserve Bank of India may have to persuade market participants to pick up the new green bond to prevent devolvement. At the auction on Nov. 29, INR 34.98 billion of a new 10-year green bond was devolved on underwriters, against the notified amount of INR 50 billion.

This was reflected in this week's underwriting fee auction, with primary dealerships bidding as high as 1 paise for the green bond, as per an Informist poll. In 2023-24 (Apr-Mar), the 30-year green bond sailed through due to insurers' demand, and some traders expect a repeat. Others are unsure whether bids would be robust considering the bond is not eligible under the fully accessible route, unlike FY24, driving away any potential demand from foreign investors.

"I think insurers will get calls (from the RBI) for the green bond today. They (government) want their greenium (additional premium for debt raised for environmental causes) right. At the previous green bond auction it was devolved so we're not expecting anything better this week," 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 23.90 billion, down from INR 30.65 billion at 0930 IST on Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.70-6.77%. (Cassandra Carvalho)

India Gilts: Seen dn on rise in US yields, short bets before weekly auction

MUMBAI – Prices of government bonds are seen lower, tracking an overnight rise in US yields. Traders may continue to place short bets ahead of the INR 370-billion weekly gilt auction. On Thursday, India's CPI inflation for November printed in line with traders' expectations, following which they offloaded any excess in portfolios to make room for auction stock, dealers said. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.70-6.77%, against 6.74% on Thursday. The yield on the 10-year US Treasury note rose to 4.33% as of 0812 IST from 4.30% at 1700 IST Thursday. US yields rose after the US Producer Price Index for November rose 0.4%, higher than a Dow Jones forecast of 0.2%. The producer price reading stoked fears of sticky inflation disrupting the Federal Open Market Committee's rate cut trajectory. While bond traders have priced in a 25-basis-point cut by the Federal Open Market Committee next week, January is expected to see a pause in rate cuts. 

Further, weekly jobless claims in the US rose to the highest level since October, showing signs of a slowing labour market. However, analysts said it could have been an outlier due to the Thanksgiving holiday in the US, dealers said. 

On the domestic front, traders await the weekly auction for direction on gilt prices. India's CPI inflation fell to 5.48% in November from 6.21% the previous month, returning to the Reserve Bank of India's comfort band of 2-6%. The lower reading is expected to improve demand for bonds at the auction, and traders may buy gilts if the result shows firm investor appetite. The government will sell INR 220 billion of the 6.79%, 2034 bond, INR 50 billion of a new 2054 green bond and INR 100 billion of the 7.09%, 2074 bond at 1030-1130 IST. While dealers said that heavy supply could inhibit aggressive bidding, the auction would likely sail through. Short bets on the benchmark 10-year gilt have increased ahead of the auction. 

After the auction result, traders will shift their focus to the FOMC meeting on Tuesday and Wednesday, dealers said. While foreign outflows have dominated this week, a cut in US rates could see US yields softening, bringing foreign investors into the gilt market, dealers said. Foreign portfolio investors sold gilts worth INR 34.97 billion through the fully accessible route this week, according to data from the Clearing Corp. of India. (Cassandra Carvalho)

End

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

Edited by Akul Nishant Akhoury

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