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Informist, Tuesday, Jan. 14, 2025

By Vidhushi RajPurohit and Aaryan Khanna

MUMBAI – Government bond prices closed higher as corporate houses received overnight indexed swaps, which led to counterparty traders picking up gilts, dealers said. Traders also covered short sales on government bonds, which they placed on Monday on fading expectation of a policy rate cut at the February Monetary Policy Committee meeting. 

The 10-year benchmark 6.79%, 2034 bond closed at INR 99.76, or 6.82% yield, compared to INR 99.57, or 6.85% yield, at the close on Monday. After the market's worst day in over six months, bonds recovered near the end of trade as the fall in the OIS rates translated to gilts. For much of the day, bonds struggled to find direction amid sharp volatility – the 6.79%, 2034 bond traded in an over-4 basis point band Tuesday. 

The corporate houses were likely receiving swap rates to hedge their bond issuances in the future, dealers said. The majority of the receiving was conducted by an infrastructure lending public-sector entity, with a power finance company joining in later in the day. Both the one-year and five-year OIS rates fell 7 bps to 6.55% and 6.29%, respectively. Traders from primary dealerships and private banks, who had paid fixed rates in swaps on Monday, rushed to the bond market to buy gilts.

"Yesterday, (Monday) there was a lot of selling by PDs (primary dealerships) and private banks, which they were covering today (Tuesday). That led to a correction in the market and the yield was also lucrative for PSUs (banks) to join in the buying," a dealer at a private bank said.

Foreign portfolio investors picked up short-term bonds as they exited riskier assets such as India's equities, though the buys were not substantial, dealers said. The rupee fell to a record low of INR 86.65 a dollar and ended at a record closing low of 86.63 a dollar after reports that cited sources as saying that RBI Governor Sanjay Malhotra was more open to flexibility in the domestic currency.

"A depreciating currency is in a way good for the debt market, as the investors who are selling their positions (in equities) try to invest those funds in the debt market," a dealer at a private bank said.

Moreover, the RBI's intervention in the foreign exchange market with its dollar sales strained the banking system's liquidity conditions and kept hope of an open market purchase of gilts up, dealers said. On Monday, the net liquidity injected by the Reserve Bank of India--a proxy for systemic liquidity conditions--rose to INR 2.50 trillion from INR 2.21 trillion on Sunday, as per data from RBI.

Dealers have been expecting the RBI's announcement of a durable liquidity measure for a month. However, the weekly statistical report released post market hours on Friday showed no purchase of gilts by the central bank. This furthered the selling on Monday, which some traders tried to cover Tuesday, dealers said. 

Meanwhile, the falling domestic currency has led traders to lower their expectations of a policy rate cut in February. "The market is not ruling it out, but they are exiting any risky positions as there is too much uncertainty and the continuous fall in the rupee is adding to it," a dealer at a state-owned bank said.

The market was volatile throughout the day. Some traders started covering their short bets early amid thin trade, with a slight fall in US Treasury yields and crude oil prices supportive. However, the 6.79%, 2034 gilt slumped within the first hour of trade as OIS rates inched up, which led to private banks and mutual funds dumping bonds immediately. These traders turned to the buying side by the end of the day, dealers said.

Traders expect a bear steepening of the yield curve in the coming days, which implies that yields on long-term bonds may rise quicker than those on short-term gilts. With Donald Trump set to assume office as US president on Monday, traders expect the 10-year US yields to continue being pushed upwards, and continued volatility in gilt prices, dealers said.

With some traders and analysts holding on to hope of a rate cut after India's CPI inflation fell to 5.22% in December, traders said short-term gilts might be in favour. Moreover, the government's buyback operation of INR 300 billion worth of five 2025-26 (Apr-Mar) bonds would push down short-term yields slightly, both due to the buys and the added liquidity, dealers said.

"A trader is always making money in a volatile market, so even if the moves are unexplained, we are relatively happy," a dealer at a primary dealership said.

As volatility increased, some traders sold relatively less traded bonds and preferred holding on to benchmark gilts, dealers said.

Trading volume for the day was INR 594.95 billion, against INR 597.25 billion on Monday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were two trades worth INR 100 million using the wholesale digital rupee pilot.

OUTLOOK 

On Wednesday, bond prices may take cues from the movement in US yields after the release of producer price data for December after market hours. US CPI data, due post market hours on Wednesday, is seen as a more important trigger, dealers said. Any geopolitical cues or a further rise in crude oil prices will also impact gilt prices.

Prices of gilts will also be sensitive to the movement of the Indian rupee against the dollar, dealers said. The domestic currency fell to a record low against the dollar for the fifth straight session on Tuesday. The RBI's intervention in the foreign exchange market with dollar sales to support the rupee has put further strain on liquidity in the banking system, while some traders still expect the RBI to conduct open market purchases of gilts, dealers said.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.79-6.86% during the day.

India Gilts: Mixed; selling pressure persists, liquid bonds up

MUMBAI--1628 IST--Prices of government bonds traded on a mixed note Tuesday amid volatile trade. Selling pressure persisted across bonds due to an intraday rise in US Treasury yields, dealers said. Heavily traded gilts such as the five-year and 10-year benchmark bonds were up as traders preferred to buy liquid securities due to the volatility in the market. 

The 6.79%, 2034 bond rose due to a fall in overnight indexed swap rates. The 5-year swap rate was down 4 basis points to the day's low at 4.31%, even as US yields rose intraday to 4.78% in European trade. Some traders also picked up the gilt after missing out on 10-year state bonds at the auction earlier in the day, dealers said. The 10-year benchmark could hold onto gains due to robust buys from state-owned banks.

"PSUs are buying at these levels—-6.85-6.87% (yield on 6.79%, 2034 bond), 6.85% is a strong support level, while other market segments are selling," a dealer at the state-owned bank said.

The Reserve Bank of India's dollar sales to prevent rupee depreciation drained system liquidity and put pressure on gilts, dealers said. The rupee fell to a record low and ended at a record closing low of 86.63 a dollar on reports that the new RBI Governor Sanjay Malhotra was more open to flexibility in the domestic currency. Traders were hoping that the RBI would announce a purchase of gilts through open market operations to ease durable liquidity, but since there hasn't been any announcement yet, there were more sellers than buyers in the broader market, dealers said.  

Despite the sharp 1.2% fall in the local unit in January, foreign portfolio investors were purchasing short-term gilts in low volumes, dealers said. Dealers speculated foreign investors exiting the Indian equities market were temporarily holding gilts to shield against the risk in equities.

The market turnover was INR 520.15 billion, against INR 548.10 billion at 1630 IST on Monday, 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 6.80-6.88%.  (Cassandra Carvalho)

India Gilts: Reverse losses; tad up in choppy trade on likely PSU bks' buys

MUMBAI--1400 IST--Prices of government bonds reversed earlier losses as state-owned banks bought gilts and traders covered short bets placed on Monday, dealers said. A fall in overnight indexed swap rates aided gilt prices. Government bond prices were down earlier in the day due to selling pressure likely from private banks and mutual funds.

State-owned banks likely bought gilts as the yield on the 10-year benchmark 6.79%, 2034 bond neared 6.87%, levels last seen on Nov. 22. Some traders also bought gilts with the view of at least a 25 basis-point rate cut during the year by the Reserve Bank of India's Monetary Policy Committee after India's CPI inflation eased to 5.22% in December, dealers said. They, however, said that the pressure from the continued fall in the rupee and any further action by the Reserve Bank of India would be crucial before the Monetary Policy Committee opts for a rate cut.

"In the morning, price action suggests that selling pressure came from private banks and mutual funds. But this is a good support (yield on 10-year at 6.87%) and looks like some reversal can be seen now at current levels," a dealer at a primary dealership said. "Rate cuts during the year are still very much on the cards even though a February cut is still being priced in at about 50%, but the medium-term scenario still looks good. Everyone is waiting for RBI (the Reserve Bank of India) to take a view on whether to let the rupee slide or not."

The five-year OIS rate fell 3 basis points to 6.32%, while the one-year swap rate also fell to 6.59%, after rising in early trade. Dealers said domestic corporate houses were likely receiving fixed rates to hedge their bond issuances, with some traders also speculating offshore traders cutting their paid fixed rate positions. The yield on the 10-year benchmark US Treasury note also eased slightly to 4.77% from 4.79% at 1700 IST on Monday. 

The market turnover was INR 364.40 billion, against INR 439.95 billion at 1430 IST on Monday, 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 6.80-6.88%.  (Srijita Bose)

India Gilts: Down in choppy trade continuing Monday's fall 

MUMBAI--1040 IST--Prices of government bonds were down in choppy trade. Selling pressure from private banks continued from Monday's sharp fall, though a slight fall in US Treasury yields and crude oil prices led to traders covering short bets near the open, dealers said.

Most traders had expected bond prices to open lower following the fall on Monday. However, traders covered short bets, placed Monday, led by purchases by state-owned banks in early trade, dealers said. The gains were reversed and traders speculated that a mutual fund or a foreign bank sold gilts at the time. The losses were limited as US yields eased further intraday. The yield on the 10-year US Treasury note eased to 4.76%-4.77% intraday from 4.79% at 1700 IST Monday. 

"This selling is just because of the macros being negative, a continuation of the sell-off yesterday (Monday)," a dealer at a private bank said. Gilt traders will track any depreciation of the rupee against the dollar, as selling pressure on gilts persisted after a falling rupee reduced hopes of a rate cut by the Reserve Bank of India's Monetary Policy Committee in February, dealers said. The rupee fell to a record low of 86.5900 a dollar on Monday, and was at 86.5325 a dollar Tuesday.

The slight easing of offshore triggers like US yields and crude oil prices were incentives to pick up gilts at the market open, dealers said. The Brent crude for March delivery was at $80.63 a barrel in Asian trade at 1025 IST, slightly lower than $81.24 a barrel at the end of Indian market hours on Monday.

Meanwhile, 10 states will raise INR 179.19 billion through bonds at an auction 1030-1130. The states' borrowing calendar for Jan-Mar indicated an amount of INR 247.19 billion. The result of the auction may lend cues to gilt prices, dealers said. 

The market turnover was INR 147.15 billion, against INR 182.35 billion at 1030 IST on Monday, 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 6.80-6.88%.  (Cassandra Carvalho)

India Gilts: Seen dn as negative sentiment persists; US ylds, crude oil unch

MUMBAI – Prices of government bonds are seen opening lower, as the global and domestic outlook for gilts remained negative, even as US Treasury yields and crude oil prices were largely unchanged, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.80-6.88% compared to 6.85% on Monday.

After the slump in gilt prices on Monday, dealers said the selling pressure was likely to persist until the yield on the benchmark 10-year bond touched the technical level of 6.88%, as bond traders would purchase gilts as this level, which is seen as profitable. 

The yield on the 10-year US Treasury note was largely unchanged at 4.78% at 0757 IST from 4.79% at 1700 IST on Monday; it briefly hit 4.81% overnight, before retreating below 4.80%. US yields have been rising ahead of the US CPI inflation data for December, due post market hours on Wednesday. After stronger-than-expected US jobs data, traders trimmed their expectations of the number of rate cuts by the Federal Open Market Committee in 2025. Ballooning government borrowing along with fears of sticky inflation in the US economy also pushed up US yields. Traders will await the US producer price index data, due post market hours Tuesday, for cues on the movement of US yields, dealers said.   

Brent crude for March delivery was also little changed at $80.68 a barrel in Asian trade at 0757 IST, compared to $81.24 a barrel at the end of Indian market hours on Monday. A rise in crude oil prices could increase chances of imported inflation in India, leading to a slower rate cut cycle by the Reserve Bank of India's Monetary Policy Committee, dealers said.

During the day, prices of gilts will also be sensitive to the movement of the Indian rupee against the dollar, dealers said. Expectations of a rate cut by the MPC in February have been dwindling as the rupee continues to fall to lifetime lows. The domestic currency fell to a record low against the dollar on Monday. The RBI's intervention in the foreign exchange market with dollar sales to support the rupee has put further strain on liquidity in the banking system, while some traders still expect the RBI to conduct open-market purchases of gilts, dealers said. (Cassandra Carvalho)

End

US$1 = INR 86.63

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

Edited by Avishek Dutta

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