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Informist, Thursday, Dec. 19, 2024

By Srijita Bose

MUMBAI – Government bond prices slumped due to a rise in US Treasury yields after US Federal Reserve officials' forecasts showed a median projection of 50-basis-point rate cuts in 2025, down from 100 bps projected in September, dealers said. Yield on the 10-year benchmark US Treasury note jumped to 4.55%, sharply up from 4.40% at 1700 IST Wednesday.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.02, or 6.79% yield, up from 100.30, or 6.75% yield on Wednesday. The yield on the 10-year benchmark ended at the highest since Nov. 28.

The revision in terminal rate guidance in the US had domestic traders concerned that the Reserve Bank of India's Monetary Policy Committee may hold off on a rate cut in February. Even if rate cuts did begin, they may be shallow and slow to maintain the current interest rate differential with the US. The consequent pressure on the rupee, which fell to a record low of near 85.0850 a dollar on Thursday, will be a concern that may make the RBI wary of lowering policy rates, dealers said.  

"The extent of a possible trade war after (US President-elect Donald) Trump comes to power is very uncertain, and not only with US yield rise, our market will also be significantly react to a tariff imposition and yields could go south from here," a dealer at a primary dealership said. "The 10-year (6.79%, 2034 gilt) yield could go to 6.85% too by December end." 

Trump's policies are seen as inflationary for the US economy with higher tariffs and tax cuts. This will drive up US yields further, making emerging market assets like India's gilts less attractive for foreign investors, dealers said. Dealers said traders would remain wary before Trump assumes office on Jan. 20.

Primary dealers placed short bets ahead of the INR 290 billion gilt auction on Friday and mutual funds sold gilts ahead of the December quarter-end, when they typically face heavy redemptions, dealers said. The repricing of rate cut expectations pushed up yields on the shorter tenure bonds more than the 10-year benchmark on Wednesday. Prevailing tight liquidity conditions also deterred traders from picking up the shorter-tenure bonds. Traders expect a further flattening of the yield curve till the end of December if the view on a repo rate cut in India in February continues to weaken, dealers said. 

Meanwhile, state-owned banks likely bought gilts as the yield on the 10-year benchmark 6.79%, 2034 bond rose to its highest since the release of the Jul-Sept GDP data, dealers said. The September quarter 5.4% growth print, a seven-quarter low and much below market expectations, had firmed bets that repo rate cuts in India were imminent. Corporate houses and insurers also bought bonds as yields rose, before the expected rate cut cycle in India began, dealers said. 

"The market was considerably well-behaved today because there is still an expectation that on the domestic side things (monetary policy) will ease out in the coming months, so some support buying came in not just from PSUs (state-owned banks) but also from across the segment such as life insurers and corporates which will be reflected in the 'others' segment," a dealer at a state-owned bank said.

According to the RBI's Negotiated Dealing System-Order Matching platform, the turnover for the day was INR 525.95 billion, sharply higher than INR 217.20 billion on Wednesday. No trade was settled using the wholesale digital rupee pilot on Thursday, while one trade worth INR 50 million was settled using the platform on Wednesday.

OUTLOOK

On Friday, prices of government bonds may take opening cues from overnight movement in US yields before the US Personal Consumption Expenditure data, due post market hours, dealers said. Traders will also be watchful before the INR 290 billion gilt auction at 1030-1130 IST.

Traders said the demand for fresh supply would be the next domestic cue for the market. The government will sell INR 140 billion worth of new five-year, 2029 gilt and INR 150 billion of 7.34%, 2064 bond at the auction. Demand for the new five-year bond is expected to come from state-owned banks and private banks, while for the longer-tenure bond, life insurers are likely to bid, albeit at higher yields, dealers said. 

Further pressure on the rupee could also weigh on gilt prices as traders fear that a weakening currency might deter the RBI from lowering policy rates. Any major geopolitical developments and movement in crude oil prices could also lend cues to gilts at opening. The yield on the 6.79%, 2034 bond is seen at 6.75-6.83% on Friday.

India Gilts: Remain sharply down as US FOMC predicts fewer rate cuts in 2025

MUMBAI--1550 IST--Prices of government bonds remained lower due to a rise in US Treasury yields after the US Federal Open Market Committee revised the 2025 rate cut guidance to 50 basis points, down from 100 bps rate cuts predicted in its September meeting. After the correction at opening, prices of government bonds moved in a narrow band, as traders refrained from placing aggressive bets due to lack of any further cues on the domestic front, dealers said.

"(US Federal Reserve Chair) (Jerome) Powell's statement at the FOMC was pretty hawkish and he himself seemed unsure about what impact (Donald) Trump's policies will have (on the US economy)," a dealer at a primary dealership said. "Currently, it looks like US yields are pricing in a 40 bps cut (in 2025) and some people are also fearing a rate hike in case inflation rises after Trump comes to power. The sell-off in our market is also coming in because of that."

The revision in terminal rates in the US has domestic traders concerned that the Reserve Bank of India's Monetary Policy Committee could also go slow on cutting rates in order to protect the interest rate differential between the US and India. The consequent pressure on the rupee, which fell to a record low of near 85.0850 a dollar on Thursday, will be a concern that may make the RBI wary of lowering policy rates, dealers said.

Meanwhile, investors mostly abstained from placing aggressive bets as they await the weekly auction on Friday to gauge the demand for bonds after the shift in the US interest rate outlook. While primary dealers placed short bets ahead of the INR 290 billion gilt auction on Friday, mutual funds sold gilts ahead of the December quarter-end, when they typically face heavy redemptions, dealers said.  

The market turnover was INR 465.20 billion at 1530 IST, up sharply from INR 147.05 billion at the same time Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.75-6.83%.  (Srijita Bose)

India Gilts: SSlump as US 10-yr yld near 7-mo high; PSU bks' buys limit fall

MUMBAI--1330 IST--Prices of government bonds remained sharply lower in afternoon trade Thursday, tracking the rise in the US 10-year Treasury yield to a near seven-month high, dealers said. The yield on the benchmark 10-year US Treasury note rose to 4.53% from 4.40% at 1700 IST Wednesday.

The US Federal Open Market Committee cut the benchmark policy rate by 25 basis points to 4.25-4.50%, which traders had widely priced in. Traders were, however, left disappointed as the Federal Reserve revised its guidance for rate cuts in 2025 to 50 bps, down from a 100 bps forecast made at its September meeting.

"Traders had already feared that the Fed might go for fewer rate cuts in the next year, but the extent of uncertainty in (US Federal Reserve Chair Jerome) Powell's statement on Trump-tariff impact has pushed investors to a sideline," a dealer at a private bank said. "Till he (Donald Trump) actually joins office, there is a lot of uncertainty and no positive in the market, and that is dragging down the market."

US President-elect Trump's policies are seen inflationary for the US economy with higher tariffs and tax cuts. This will drive up US yields further, making emerging market assets like India's gilts less attractive for foreign investors, dealers said. Dealers said traders would remain wary before Trump assumes office on Jan. 20. Dealers also feared that a slower pace of US rate cuts could potentially delay rate cuts in India as well, though the Reserve Bank of India's Monetary Policy Committee is widely expected to begin cutting the repo rate in February.

Dealers also said the pressure from the rupee also led to the fall in gilt prices as foreign portfolio investors cut their exposure to Indian markets. The rupee fell to a record low of 85.08 to a dollar during the day after the FOMC's decision.

Private banks and primary dealers likely sold government bonds during the day, dealers said. State-owned banks, however, likely bought gilts as the yield on the 10-year benchmark 6.79%, 2034 bond rose to its highest since the release of the Jul-Sept GDP data, and this limited some losses. 

The market turnover was INR 388.30 billion at 1330 IST, up sharply from INR 103.95 billion at the same time Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.75-6.83%.  (Srijita Bose)

India Gilts: Sharply dn as 10-yr US yield at 6-month high post FOMC outcome

MUMBAI--1012 IST--Prices of government bonds were sharply down as the yield on the 10-year US Treasury note rose to a six-month high of 4.52%, dealers said. US yields rose as the Federal Open Market Committee revised its guidance for rate cuts in 2025 to 50 basis points, down from a 100 bps forecast made at its September meeting. 

Private and foreign banks were likely trimming their portfolios after the FOMC outcome, along with primary dealerships ahead of the weekly bond sale on Friday. State-owned banks' purchases prevented a further fall in prices, though their appetite is unknown after being net buyers in the run-up to the FOMC outcome since last Thursday as well, dealers said. Bonds were seen lucrative as the 10-year benchmark yield was at its highest since the release of Jul-Sept GDP data, which had disappointed the market and led to firming expectations of a repo rate cut by February.

"It's all about how much PSUs (state-owned banks) can hold right now," a dealer at a private bank said.

Dealers said that other than the FOMC's rate cut forecast, its upward revisions of US inflation and growth estimates were also negatives for bond traders. Some short sellers were also covering their bets placed ahead of the US policy outcome. Dealers said demand from banks for their asset-liability management may prevent the 10-year gilt yield from rising above 6.80% immediately.

Short-term bonds were not traded yet, but dealers expect their yields to shoot up more than other tenures. Short-term bonds are most sensitive to near-term rate cut views, and the slowdown in expected US rate cuts has led to traders once again rethinking a rate cut in India in February, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 151.95 billion, up from INR 32.15 billion at 1030 IST on Wednesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.72-6.80%. (Cassandra Carvalho)

India Gilts: Seen dn on rise in US ylds after FOMC sees lesser cuts in 2025

MUMBAI – Prices of government bonds are likely to open lower, tracking an overnight rise in US Treasury yields, after the Federal Open Market Committee cut rates by 25 basis points but suggested fewer rate cuts in 2025, with a more cautious approach to easing policy, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.72-6.80% compared to 6.75% on Wednesday. 

The yield on the 10-year US Treasury note jumped to 4.52% as of 0830 IST, the highest since May 31. The US FOMC voted with an 11-1 majority to cut the Fed funds target range by 25 bps to 4.25-4.50%, which bond traders had already priced in. However, the highly-awaited Summary of Economic Projections, released along with the FOMC statement, showed the median Federal Reserve official expects another 50 bps of rate cuts in 2025, against the previous guidance of 100 bps cuts in September.  

US Federal Reserve Chair Jerome Powell said the FOMC could afford to be more cautious in considering further adjustments to its policy rate. This comes against the backdrop of US president-elect Donald Trump taking office in January.

Dealers said a slower pace of US rate cuts could potentially delay rate cuts in India as well, even though the Reserve Bank of India's Monetary Policy Committee is widely expected to begin cutting the repo rate in February. Trump's policies on tariff, tax and immigration are seen inflationary for the US economy, driving up US yields and making emerging market assets like India's gilts less attractive for foreign investors, dealers said. 

Gilt traders will now await the minutes of the MPC's December meeting, due at 1700 IST Friday. Dealers said they would focus on the comments from the three external members of the rate-setting panel, two of whom -- Nagesh Kumar and Ram Singh -- voted for a rate cut. Former RBI governor Shaktikanta Das' comments will be less important, as will RBI Deputy Governor Michael Patra's, as they will not be voting in the February MPC. Das' term came to an end last week, while Patra's term is scheduled to end on Jan. 14. (Cassandra Carvalho)

End

US$1 = INR 85.07

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

Edited by Deepshikha Bhardwaj

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