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Informist, Tuesday, Dec. 31, 2024

By Vidhushi RajPurohit

MUMBAI – Prices of government bonds ended higher on Tuesday due to a sharp fall in US Treasury yields following lower-than-expected US economic data. High deficit liquidity in the banking system also raised hopes of the Reserve Bank of India conducting open market purchases of gilts to infuse liquidity, dealers said.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.20, or 6.76% yield, against INR 100.11, or 6.77% yield on Monday. The 10-year benchmark yield ended 42 basis points lower in 2024, despite the repo rate remaining unchanged at 6.50%.

The yield on the 10-year US Treasury note fell to 4.52% at 1700 IST Tuesday from 4.60% on Monday as business activity in the Chicago region in December was lower than forecast and home sales fell across the world's largest economy in November. A fall in US yields increases the interest rate differential between safe-haven assets and emerging market debt and makes the latter more appealing to foreign investors.

Lower US yields likely led to inflows from foreign portfolio investors, dealers said. Foreign banks also bought gilts for offshore clients, owing to the increase in the weightage of India's fully accessible route bonds on J.P. Morgan's emerging market bond index at the end of December. However, gains in bonds were kept in check due to sales from domestic banks at a profit, after they had picked up the 10-year gilt at around 6.80% yield over the past week.

Data from the Clearing Corp. of India at 1908 IST showed foreign portfolio investors bought nearly INR 21 billion worth of bonds on Tuesday. Dealers said foreign portfolio investors were unable to buy gilts adequately on Monday as the dollar-rupee settlement would fall on Jan. 1, a dollar holiday, which would have increased the cost of entering the Indian market.

"The prices were extremely tight today as the buying was actively met by PSUs (state-owned banks) as they were booking profits," a dealer at a private bank said.

The persisting deficit in the banking system led traders to speculate on the chance of RBI purchasing gilts under open market operations, either through the secondary market or through an auction. RBI data showed the liquidity deficit in the system was at INR 2.06 trillion on Monday, despite the infusion of around INR 1.16 trillion in December due to the staggered cash reserve ratio cuts. The central bank was also said to be selling dollars to limit the depreciation in the rupee, which ended at a record closing low of 85.6150 a dollar on Tuesday.

Dealers also said that a probable policy rate cut in February would require systemic liquidity conditions to improve to be effective in transmitting the cut to the real economy, something the RBI will strive to do. The central bank has been active in its liquidity-management operations through regular variable rate repo auctions, but dealers expect it to step in with a more durable tool. 

"The RBI cannot go for a rate-cut with such a high deficit, that is why the market is still not ruling out the chances of OMO despite it being a month of deficit," a dealer at a state-owned bank said.

High deficit liquidity also led to the cut-off at Tuesday's state bond auction slightly above expectations, even though all the bonds on offer were long-term, dealers said. At the auction, 10 states raised INR 247.29 billion. The cut-off for the 12-year bonds was in the range of 7.15-7.17%, higher than the median estimate of 7.14% in an Informist poll.

Trading volumes for the day were at INR 256.35 billion, higher than INR 186.05 billion on Monday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trades using the wholesale digital rupee pilot for the fourth straight day. 

OUTLOOK

On Wednesday, gilt prices may take cues from the US Treasury yields at open, dealers said. Volume is expected to remain muted due to the absence of several traders on New Year's Day. However, some foreign banks and primary dealerships may increase their activity as they resume trading activity after the break. 

Gilt prices will also track movement in the Indian rupee against the dollar, after it hit a series of record lows last week. Any major geopolitical developments and movement in crude oil prices could also lend cues to gilt prices at the open.

After market hours, the RBI released the indicative calendar for state bond issuances in Jan-Mar, which was slightly higher than traders expected. States are scheduled to borrow INR 4.73 trillion in Jan-Mar, up from INR 2.53 trillion they raised through bonds in Oct-Dec. In Jan-Mar 2024, states raised INR 4.03 trillion through bonds.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.73-6.80% during the day.

India Gilts: Remain up tracking fall in US yields; volumes low at year-end

MUMBAI--1500 IST—Government bond prices remained up because of the fall in US Treasury yields. This likely led to purchases from private and foreign banks, though state-owned banks likely sold bonds at a profit, capping gains, dealers said.

Traders also picked up bonds on hopes of an open market purchase of gilts by the Reserve Bank of India to infuse durable liquidity into the banking system, dealers said. RBI data showed deficit liquidity was at INR 2.06 trillion on Monday, despite the infusion of around INR 1.16 trillion in December due to the staggered cash reserve ratio cuts by the central bank this month. The RBI has also been proactive in providing liquidity through variable rate repos, a temporary measure, as credit demand spikes at the end of the quarter.

"There are credit outflows in line and on top of that, we are not seeing the deficit easing, so some traders are likely buying by taking the chance of OMO purchase by RBI as a cue," a dealer at a state-owned bank said.

Traders remain unsure regarding inflows from foreign portfolio investors during the day. Some traders remain hopeful regarding investments from foreign investors on the back of an increase in the weightage of Indian gilts on J.P. Morgan emerging market bond index. However, most dealers expect the activity of foreign players to resume only next week, armed with higher risk limits to invest into emerging market assets like gilts.

Trade volumes are higher than Monday's level due to the external trigger. The yield on the 10-year US Treasury note fell to 4.51%, against 4.60% at the end of Indian market hours Monday, after weak economic data released Thursday increased hopes of sharper rate cuts in the US in 2025. However, volumes remained muted overall owing to the absence of many traders on New Year's Eve.

Dealers also await the RBI's release of the indicative calendar for state borrowing through bonds in Jan-Mar. Expecting the borrowing figure to lie in the range of INR 4.3 trillion-INR 4.6 trillion, traders said the initial reaction in gilts may be muted. However, a borrowing aim close to INR 5 trillion could lead to significant volatility in the market with the 10-year yield rising 5-9 basis points , dealers said.

The market turnover was INR 163.30 billion, up from INR 86.50 billion at 1530 IST on Monday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.74-6.80%. (Vidhushi RajPurohit)

India Gilts: Up on overnight fall in US yields after weak economic data

MUMBAI--1026 IST--Prices of government bonds were up, tracking an overnight fall in US Treasury yields as fresh data suggested economic sluggishness, dealers said. Volumes were thin, but better than Monday's figures, due to the offshore trigger.
 

The yield on the 10-year US Treasury note fell 6 basis points overnight to 4.54%, as business activity in the Chicago region in December was lower than forecast. Housing data for November in the US also showed that pending house sales were the highest since early 2023.

"Now traders are only buying because of the fall in US yields. Volumes are low because most traders are on leave, so there's not much happening," a dealer at a state-owned bank said.

Traders picked up bonds for their trading books for the next quarter, as gilts are settled on a 'T+1' basis and Tuesday's trading will reflect on the books in the Jan-Mar quarter. Dealers said they expected foreign inflows during the day, as the J.P. Morgan emerging market bond index suite readjusted the weight of Indian gilts to 7%. The fall in US yields also made Indian gilts appealing for foreign investors, which would likely see them entering the gilt market. 

Most traders were on leave on New Year's Eve, keeping volumes low. Trade volumes in the 6.92%, 2039 paper picked up as it has emerged as the new 15-year benchmark, with trades in the older 7.23%, 2039 bond down over the last two weeks, dealers said. 

The market turnover was INR 51.20 billion, slightly lower than INR 54.50 billion at 1030 IST on Monday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.74-6.81%. (Cassandra Carvalho)

India Gilts: Seen up on fall in US yields; volumes to remain low at year-end

MUMBAI – Prices of government bonds are seen opening higher, tracking an overnight fall in US Treasury yields, dealers said. Trade is expected to remain thin as several dealers are still on leave on New Year's Eve. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.74-6.81%, compared to 6.77% on Monday. 

The yield on the 10-year US Treasury note fell to 4.54% at 0740 IST from 4.60% at 1700 IST Monday. US yields fell sharply after the Chicago purchasing managers' index print was much lower than expected, spurring expectations that the US Federal Open Market Committee may take stronger action to boost economic activity. Data also showed that US pending home sales rose in November, adding to the fall in US yields, dealers said. 

Gilt traders will also look at the Reserve Bank of India's actions on rupee depreciation and liquidity management, after the domestic currency hit a series of record lows last week. On Monday, the currency hit a lifetime closing low of 85.5350 a dollar. Meanwhile, some inflows from foreign portfolio investors are expected on Tuesday as India's weight on J.P. Morgan's emerging market bond index increases by 1 percentage point at the end of the month.  

Traders await the weekly state bond auction at 1030-1130 IST, wherein 10 states aim to raise INR 247.29 billion. The state bond calendar for the Jan-Mar quarter is expected to be announced by the RBI this week. (Cassandra Carvalho)

End

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

Edited by Saji George Titus