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Informist, Monday, Dec. 16, 2024

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended lower, tracking an overnight rise in US yields ahead of the Federal Open Market Committee's meeting this week, dealers said. The two-day meeting of the FOMC will conclude late Wednesday and the rate decision is scheduled early Thursday. 

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.32, or 6.74% yield, against INR 100.43, or 6.73% yield Friday. Trade volumes were muted and prices moved in a narrow range during the day due to caution ahead of the key event, and lack of any significant domestic cues.

The yield on the 10-year US Treasury note jumped to 4.38% Monday from 4.33% at 1700 IST Friday. While bond traders have fully priced in a 25-basis-point rate cut by the FOMC at its upcoming meeting, uncertainty over the Summary of Economic Projections, the FOMC's forecast for rate cuts next year, pushed up Treasury yields, dealers said. Traders fear that the FOMC may pause its rate-cut cycle later, and consequently shift expectations from four rate cuts to three next year. 

"We've priced in a 25 bps cut, but it will be a hawkish cut because the Fed (US Federal Reserve) may slow down its rate-cutting cycle," a dealer at a private bank said. "So we're cautious and there are just intraday trades happening today (Monday)."

Traders further trimmed portfolios nearing the close of trading hours to reduce exposure ahead of the US Flash Manufacturing and Services Purchasing Managers Index data for December, due at 2015 IST. Traders feared that a strong data print could weaken the case for rate cuts in the world's largest economy, and could show its impact on monetary policy as early as the FOMC's upcoming statement. 

State-owned banks likely bought gilts in light volumes, as the yield on the 10-year benchmark gilt neared 6.75%, the upper end of the recent trading range for the 2034 paper, dealers said. Traders expect a repo rate cut by the RBI's Monetary Policy Committee in February, by 25 basis points to 6.25%, after India's CPI inflation eased to 5.48% in November, which is within the RBI's comfort band. The recent data print came as a relief after a 14-month high of 6.21% in October.

Bonds found support from speculation that the Reserve Bank of India has been buying gilts in the open market, or could do so in coming days to limit the strain on liquidity, dealers said. 

The central bank may have to resort to bond purchases under open market operations as its dollar sales in the foreign exchange market have drained durable liquidity on a large scale, dealers said. Market players were of the view that the 50-bps cut in the cash reserve ratio announced by the RBI at its policy review earlier this month may not be enough to alleviate the cash crunch in the banking system. The RBI may either buy bonds on the open market, or announce bond purchase auctions under open market operations, dealers said. 

Bond purchases by the RBI would bring a lot of cheer to the market due to the additional demand, which is seen driving up gilt prices, especially in tenures that the central bank would choose to buy. An auction might be announced as early as Friday, dealers said, while others said the central bank had picked up gilts last week in the secondary market, which would show up in data to be released on Friday.

Soon after bonds opened on a negative note, traders speculated that a large single investor had picked up a chunk of gilts in early trade when trade volumes were muted, which led to a temporary price rise in the 10-year benchmark 6.79%, 2034 gilt, dealers said.

While the prices of gilts were largely in the red, the 15-year papers traded on a positive note as these bonds offered lucrative spreads over the 10-year benchmark gilt, dealers said. With a rate cut cycle in sight, dealers said they expected spreads to reduce, due to which they picked up the bond while yields remained higher. The spread between the 6.79%, 2034 gilt and the 7.23%, 2039 gilt has narrowed to 10 bps, from 12 bps in early December. 

"I think traders are playing for spread compression, you sell the 10-year (6.79%, 2034 gilt) and buy the 15-year papers," a trader at a primary dealership said. 

According to the RBI's Negotiated Dealing System-Order Matching platform, the turnover for the day was INR 216.35 billion, down significantly from INR 464.25 billion Friday. Two trades worth INR 100 million were settled using the wholesale digital rupee pilot on Monday, whereas no trades were settled under this method on Friday. 

OUTLOOK

On Tuesday, bond prices will take cues from the overnight movement in US yields after the release of the US Flash Manufacturing and Services Purchasing Managers' Index, dealers said. The data will be one of the last prints for the FOMC to examine before it makes its decision late Wednesday. A print higher or lower than the consensus view could see a shift in the FOMC's outlook on growth and inflation, dealers said.

Traders are likely to track US yields ahead of FOMC's statement due early Thursday, amid a lack of domestic cues. Any developments in West Asia, the Russia-Ukraine war, and crude oil prices may impact gilt prices on Tuesday. While crude prices rose Monday, dealers said the rise was negligible and that gilts would take cues from it only if the jump in prices was significant. The yield on the 6.79%, 2034 bond is seen at 6.71-6.77% Tuesday.

India Gilts: Remain down as US ylds rise; hopes of RBI OMO buys limit losses

MUMBAI--1405 IST--Prices of government bonds remained lower, tracking the rise in US Treasury yields over the weekend. Losses were limited as traders speculated that the Reserve Bank of India had already bought gilts in the open market, or was planning to buy during the week, dealers said.

An open market operation is seen likely, as liquidity in the banking system is tight and the RBI does not have any other way to inject liquidity durably, dealers said. The RBI can either buy gilts on screen, through the Negotiated Dealing System – Order Matching platform, or announce an auction to mop up gilts from the secondary market. Either of the two would bring cheer to traders due to the additional demand, which is seen driving up gilt prices in tenures that the central bank would choose to buy. An auction might be announced as early as Friday, dealers said, while others said the central bank had picked up gilts last week on screen, which would show up in data to be released on Friday.

This was one of the reasons attributed to the recovery in gilt prices early, after opening lower. Another reason that traders speculated was a large single investor seeking to pick up a chunk of gilts in early trade, and the muted trade volumes led to volatility in the 10-year benchmark 6.79%, 2034 gilt, dealers said.

"People are expecting RBI to come out with OMO (open market operation) this week, so that anticipation is keeping (price) levels supported," a dealer at a primary dealership said. "Otherwise also, trading volumes are so small since everyone is waiting for the FOMC's dot plot which will provide a clarity on quantum of rate cuts in the next year."

Moreover, domestic investors were keen to pick the 10-year gilt as its yield neared 6.74%, which they considered lucrative. Traders expect a repo rate cut by the RBI's Monetary Policy Committee in February, by 25 basis points to 6.25%, after India's CPI inflation eased to 5.48% in November, within the RBI's comfort band.

Selling pressure was limited despite the rise in US Treasury yields, as foreign banks' and investors' activity was muted near the year-end, dealers said. Trade volumes were limited due to caution ahead of the outcome of the US Federal Open Market Committee's meeting, due early Thursday. The 10-year US Treasury yield was at 4.38%, up 5 basis points compared to 1700 IST Friday.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 104.70 billion, down from INR 259.95 billion at 1430 IST on Friday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.72-6.76%.  (Srijita Bose)

India Gilts: Dn on rise in US ylds; losses limited as prices seen lucrative

MUMBAI--1012 IST--Prices of government bonds were slightly lower due to a rise in US Treasury yields over the weekend. After opening lower, gilt prices recovered sharply due to large purchases by some traders, before sinking again, dealers said.

"There was some abrupt buying at open, but it is too soon to say who was on the buying side. The volumes were not that significant and the prices soon cooled off," a dealer at a primary dealership said. "Overall, we will be tracking the global cues, as there's nothing evolving on the domestic front."

The yield on the 10-year US Treasury note rose to 4.39% from 4.33% at the time the Indian market closed on Friday. Globally, investors fear that the Summary of Economic Projections from US Federal Reserve members on Thursday would signal only shallow or no rate cuts in 2025. Additionally, the policies proposed by US President-elect Donald Trump, seen as inflationary and pushing up the fiscal deficit in the world's largest economy, are also a negative for long-term US yields.

Due to the lack of significant domestic cues, dealers said gilt prices may continue to take cues from the rise in US yields even if the impact is muted. Prices may not fall much further, as banks are seen picking up the 10-year 6.79%, 2034 gilt at 6.74-6.75% yield, which is seen as lucrative. This is likely to counteract the selling pressure in the market, dealers said. The 10-year gilt yield is approaching the top of the 6.65-6.75% trading range seen in December.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 43.45 billion, down from INR 57.40 billion at 1030 IST on Friday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.72-6.76%. (Vidhushi RajPurohit)

India Gilts: Seen lower as US yields rise; US FOMC outcome awaited

MUMBAI – Prices of government bonds are seen opening lower on a rise in US Treasury yields over the weekend, dealers said. Intraday bets ahead of the US Federal Open Market Committee's rate decision could lead to volatility in prices, they said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.70-6.77%, compared to 6.73% on Friday. 

The yield on the 10-year US Treasury note rose to 4.40% as of 0755 IST from 4.33% at 1700 IST Friday. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors. US yields rose as traders reassessed the pace of US rate cuts in 2025 ahead of the December meeting, where the FOMC is expected to cut interest rates by 25 basis points. The US rate decision is scheduled early Thursday.

Foreign investors may continue to trim their holdings of India gilts due to the rise in US yields and before the FOMC outcome, dealers said. They sold around INR 37 billion worth of bonds under the fully accessible route last week, according to Clearing Corp. of India data.

On the domestic front, traders have already priced in a 25-bps rate cut by the Monetary Policy Committee headed by new Reserve Bank of India Governor Sanjay Malhotra at its next meeting in February. Banks are likely to stock up on the 10-year gilt as its yield tops 6.75%, which is considered lucrative, dealers said. (Srijita Bose)

End

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

Edited by Tanima Banerjee

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