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Informist, Wednesday, Jan. 8, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended lower Wednesday taking cognisance of a further rise in the 10-year US Treasury yield to a fresh nine-month high towards the end of trade. Bonds fell sharply from intraday highs as foreign portfolio investors sold a significant quantum of gilts, dealers said.

The 10-year benchmark 6.79%, 2034 bond closed at INR 100.14, or 6.77% yield, compared to INR 100.28, or 6.75%, at Tuesday's close. During the day, the benchmark traded in a range of 23 paise, swinging between gains and losses as the market alternated between taking direction from offshore and domestic triggers.

The yield on the 10-year US Treasury note rose to 4.71% at 1700 IST, from 4.64% at the end of Indian market hours Tuesday. The US yield touched its highest level since Apr. 26. Domestic traders fear that the benchmark US yields could rise to as much as 5%, a high hit in October 2023, as incoming President Donald Trump's policies promised in his campaign are seen to be inflationary.

Foreign portfolio investors sold INR 35.37 billion worth of gilts through the fully accessible route, according to data from the Clearing Corp. of India as of 1730 IST. 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 are going up because the US has problems of its own. Our yields could also go up by another 4 basis points if US (10-year) touches 4.90%," a dealer at a private bank said. "FPIs and foreign banks have been driving the activity this week, but I think the domestic (market) has enough depth and enough cues to remain anchored (in yield terms)."

Bond prices closely tracked the movement of overnight indexed swap rates to gauge the impact of rising US yields on the Indian market, dealers said. The five-year swap rate was anchored near Tuesday's close for most of the day, with bonds also holding on to gains, but ended 4 bps higher at 6.20%.

Foreign banks were speculated to be buyers at various points during the day owing to increased risk appetite, but they may not be significant net buyers because of foreign clients' sales, dealers said. State-owned banks may also have switched to buying gilts as prices fell, after being sellers earlier in the day. State-owned banks have net sold gilts in the secondary market for 10 of the last 11 trading days stretching back to Dec. 23, taking out profits as prices rose and buying cheaply at the auction.

In the last two days of December, state-owned banks net sold gilts worth INR 48.45 billion, according to Clearing Corp. of India data. Dealers said the banks were looking to replenish their portfolios when the 10-year gilt yield approached 6.78%. Draft norms on the liquidity coverage ratio by the Reserve Bank of India will probably drive up banks' need for high-quality liquid assets, and picking up bonds was a safe bet before the proposed start date of Apr. 1, dealers said.

"See, because of LCR (liquidity coverage ratio) requirements and other such issues, we don't want to sell that much also. And they (state-owned banks) have sold from AFS (available-for-sale) books to book profits for the December quarter balance sheet," a dealer at a state-owned bank said. "So we're looking to buy soon, just waiting for levels."

Unlike private banks, state-owned banks also did not build heavy positions before the first advance estimate of India's GDP growth for the financial year 2024-25 (Apr-Mar). Some traders, especially those of private banks, were expecting a reading lower than the 6.4% estimate, which was in line with the median of an Informist poll. They had picked up bonds accordingly, and trimmed holdings Wednesday after the data failed to make a fresh case for a February rate cut. Some traders also hit stop-losses on their bond buys before the GDP data, dealers said.

Longer-term bonds outperformed other tenures, and traders speculated that mutual funds or insurance companies were purchasing those papers. A dealer also said that the rise was due to forward-rate agreements written during the day.

The market struggled to find direction in the first half of the day, with traders buying into the early fall due to an overnight rise in US yields following strong economic data on job openings and purchasing managers' indices. Positive domestic cues took centre-stage, and gilts recovered all losses as traders said bond prices were lucrative if the RBI's Monetary Policy Committee does cut the repo rate by 25 basis points in February, taking into account easing inflation and GDP growth lower than the RBI's own downwardly-revised 6.6% forecast for FY25.

Moreover, demand for bonds is expected to exceed supply over the next year, with the government's gross borrowing in FY26 scheduled to ease after it buys back INR 250 billion worth of five gilts maturing in that year on Thursday. As liquidity conditions in the banking system are set to remain tight at least till the end of the March quarter, some traders also hold out the hope that the RBI will announce an open market purchase of gilts to shore up dwindling durable liquidity, dealers said.

Trading volume for the day was INR 548.05 billion, down from INR 836.25 billion Tuesday, 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 ninth straight day.

OUTLOOK

On Thursday, bond prices may take cues from the overnight movement of US Treasury yields after the release of the minutes of the US Federal Open Market Committee's December meeting and economic forecast, dealers said. US private jobs data and weekly jobless claims are also awaited.

Traders await the INR-250-billion government bond buyback auction at 1030-1130 IST Thursday. Bond traders will also start taking positions ahead of India's CPI inflation data for December due Monday.

Traders will also track the number of human metapneumovirus, or HMPV, cases in the country, with seven cases confirmed by the central government Tuesday. Any shutdown or slowing of economic activity, similar to lockdowns seen during the COVID-19 pandemic, would see a rise in gilt prices as the RBI could cut rates sooner to aid economic growth.

During the day, gilt prices will also track the movement in the Indian rupee against the dollar, after it hit a record closing low yet again Wednesday. Any major geopolitical developments and a further rise in crude oil prices could also lend cues to gilt prices at the open.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.72-6.80% during the day.

India Gilts: Reverse gains as 5-year OIS rises, profit booking takes hold

MUMBAI-–1630 IST--Prices of government bonds reversed gains and fell, tracking a rise in the five-year overnight indexed swap rate, dealers said. Private banks were likely selling heavily to book profits on bonds purchased earlier this week.

Private banks were trimming stocks they had picked up on Tuesday on hopes that the advance estimate of India's GDP for 2024-25 (Apr-Mar) will be lower than the consensus estimate of 6.4%. Since that did not materialise, they sold bonds on Wednesday. Primary dealerships, which did not position as heavily as private banks due to high overnight borrowing rates, also trimmed their trading positions, dealers said.

While state-owned banks also sold bonds earlier, dealers said they were looking to pick up gilts as earlier gains reversed and prices fell. "We are on the selling side but not as aggressively, private banks have taken over right now," a dealer at a state-owned bank said. 

Purchases by foreign banks kept losses limited, as their risk appetite is high at the beginning of their new financial year, dealers said. Gilt prices see-sawed between gains and losses Wednesday due to divergent cues from offshore and domestic markets. The 10-year US Treasury yield hit a nine-month high, which pushed up the five-year swap rate, while traders remained optimistic about the Reserve Bank of India cutting the repo rate in February and demand for bonds exceeding supply.

The market turnover was INR 498.20 billion, against INR 731.20 billion at 1630 IST on Tuesday, according to data on the RBI'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%.  (Cassandra Carvalho)

India Gilts: Recover losses; traders buy at lows to bet on Feb rate cut

MUMBAI--1315 IST--Prices of government bonds recovered all losses and were slightly higher owing to likely buying by foreign and private banks betting on easing policy rates in India, dealers said. The purchases offset an overnight rise in US Treasury yields after strong US economic data.

Traders also took advantage of the fall in prices from Tuesday's highs, after some traders shed bonds as their bets on a lower GDP growth figure did not materialise. India's first advance estimate for GDP growth in 2024-25 (Apr-Mar) was 6.4%, in line with analysts' estimates, but higher than what some traders had positioned for.

"Those who had an overload of positions as they were expecting even lower GDP data already sold yesterday (Tuesday), so now traders who want to price in a rate cut have gained fresh ground to start buying," a dealer at a primary dealership said.

Foreign banks have been picking up gilts to rebuild their trading portfolios after exiting positions in December. Among domestic participants, private banks are also seen buying gilts, betting on positives from the Union Budget as well as on rates, dealers said.

"The effect of (a rise in) US yields was seen on the (gilt) prices at open, but trading on that was done then. Now, intraday trade is taking into account domestic cues and unless there is volatility in the US yields, the market will keep its eyes on domestic cues," a dealer at a private bank said. The yield on the 10-year US Treasury note rose to 4.68% from 4.64% at 1700 IST on Tuesday, as job openings were higher than expected in November and purchasing managers' index readings for December also beat expectations.

The market turnover was INR 273.45 billion, against INR 511.45 billion at 1330 IST Tuesday, according to data on the RBI'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: Tad down as US yields rise; losses limited on Feb rate cut hope

MUMBAI--1035 IST--Prices of government bonds were a tad lower due to an overnight rise in US Treasury yields. However, the losses were limited due to optimism around the domestic fiscal situation and rate cuts, reducing the correlation of the domestic market with US yields, dealers said.

The yield on the 10-year US Treasury note rose to 4.69% from 4.64% at 1700 IST on Tuesday, as data showed job openings rose in November. Despite the narrowing yield differential--to at least a two-decade low of 206 basis points--between the 10-year US and India government securities, gilt prices did not see a sharp fall as dealers remained watchful as regards to the chances of a potential India rate cut in February.  

Some traders were disappointed that the first advance estimate of GDP growth for 2024-25 (Apr-Mar) did not provide an incremental trigger for rate cuts. However, with the government estimating GDP growth at 6.4%, below the Reserve Bank of India's 6.6% forecast, and inflation expected to cool in the reading for December, due next week, dealers said the RBI's Monetary Policy Committee was still likely on track to cut the repo rate of 6.50% by 25 bps.

"The prices of gilts will be data-driven, and traders will avoid any sharp or sudden reaction as there is still hope of a rate cut (in February), which is holding up the prices, even when we see US yields inching near 4.70%," a dealer at a private bank said.

Dealers expect foreign banks to continue picking up gilts, as they are likely building trading positions at the beginning of 2025 on a positive view on domestic fundamentals. Gilt prices will also not fall sharply ahead of the government buying back five gilts worth INR 250 billion at an auction Thursday, dealers said. This will bring down the government's gross borrowing for FY26 ahead of the Union Budget on Feb. 1.

The market turnover was INR 97.10 billion, against INR 250.70 billion at 1030 IST Tuesday, according to data on the RBI'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: Seen down tracking an overnight rise in US yields

MUMBAI – Prices of government bonds are likely to open lower due to a rise in US Treasury yields following the release of the US Job Openings & Labor Turnover Survey, which showed resilience in the world's largest economy, dealers said. Gilt prices may also be weighed down as the first advance estimate of GDP growth for 2024-25 (Apr-Mar) did not cement the February repo rate cut view. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.74-6.80%, compared to 6.75% on Tuesday.

The 10-year US Treasury yield rose to 4.68% at 0828 IST, its highest level since April, from 4.64% at the end of Indian market hours Tuesday. The rise in US yields was owing to the stronger US job data for November, which showed vacancies at 8.098 million, up from 7.839 million October.

The resilience of the US economy is seen as a signal that the Federal Open Market Committee does not need to cut rates sharply in 2025. 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.

On the domestic front, on Tuesday, the statistics ministry pegged GDP growth for the current financial year at a four-year low of 6.4%. However, dealers were expecting an even lower estimate in the 5.5-6.0% range, which could have strengthened their hopes for a policy rate cut in February. During the day, traders will also take cues from the movement of the Indian rupee against the dollar, following a surge in the dollar index, as it rose from the one-week low it hit on Monday. 

The fall in gilt prices will be limited by persisting hopes of rate cuts in India in February, as well as the government's buyback auction on Thursday. The government will buy back INR 250-billion worth of five gilts maturing in FY26 on Thursday. Traders also expect more buybacks this month, which is seen bringing down the gross borrowing in FY26, dealers said.  (Vidhushi RajPurohit)

End

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

Edited by Rajeev Pai

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