More Stories

Informist, Thursday, Feb. 6, 2025

By Vidhushi RajPurohit

MUMBAI – Prices of government bonds ended slightly higher Thursday due to an overnight fall in US Treasury yields. Gains were minimal across most bonds as hopes of a 25-basis-point repo rate cut at the Reserve Bank of India's Monetary Policy Committee meeting's outcome Friday were already priced in, dealers said.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.93, or 6.66% yield, against INR 100.89, or 6.66%, Wednesday. Traders mostly refrained from aggressive positioning on the 2034 gilt and short-tenure bonds a day before the rate-setting panel's outcome, having already placed their bets since the start of the week.

"There was caution today before the meeting's outcome, which limited some price movement, but sentiment remained positive as US yields were down, and the market is widely expecting a rate-cut this time," a dealer at a primary dealership said. 

The yield on the 10-year US Treasury note was at 4.45% at 1700 IST, down from 4.48% at the close of Indian market hours Wednesday. The slump in US yields pushed gilt prices up at the open. However, the positive from the offshore could not sustain for long in the 10-year benchmark 2034 gilt, which did not gain by as much as some bonds in shorter and longer durations. Dealers said traders' expectation of other tenures offering higher returns in case of a rate cut was the reason for gains in the 2034 bond being capped.

Traders said the 10-year gilt reflected a 90% chance of a 25 bps repo rate by the rate-setting panel Friday, as India's GDP growth is seen falling to a four-year low of 6.4% in the financial year 2024-25 (Apr-Mar), and CPI inflation is expected to ease to the RBI's target of 4% in the coming quarters. Two members of the six-member panel--Nagesh Kumar and Ram Singh--had voted for a 25 bps rate cut at the previous meeting in December.

On the cusp of a possible rate cut, traders flocked to illiquid paper across tenures as they offered higher yields before the rate cut, having not fallen as much as the benchmark gilts. Illiquid bonds such as the 7.32%, 2030 paper gained popularity as traders said those gilts were undervalued and hence had larger spreads compared to liquid paper. The 2030 paper offers 5 bps higher yield than the five-year benchmark 6.75%, 2029 gilt despite maturing only 11 months later.

Prices of long-tenure bonds rose more than other segments as spreads had widened over the past two weeks, and traders looked for greater price appreciation in case of a rate cut, dealers said. Demand from life insurers and mutual funds also picked up for long-term bonds as these non-leveraged investors chase higher total returns. The price appreciation of long-term bonds is much greater per basis-point fall in yield due to their longer terms of maturity.

After a rate cut, the spread of long-term bonds over the 10-year gilt may widen further, which could attract traders to bet on a yield compression between the segments and pick up long-term bonds, dealers said. Between Jan. 24 and Tuesday, the 40-year 7.34%, 2064 gilt yield's spread over the 10-year yield had widened by 9 bps to 39 bps. Over the past two days, traders have already jumped on the spread trade, and since Tuesday, the spread of the 40-year gilt over the 10-year gilt has come down by 2 bps.

"Everyone is looking at a potential rate cut now. Those who wanted to position have done that already. Longer-tenure gilts were lagging a bit earlier, but since Wednesday, on hopes of capital appreciation, they have also received the anticipated interest from both investors and traders," a dealer at a state-owned bank said. 

The longer-tenure papers have been out of favour as traders mostly flocked to heavily traded and short-tenure securities in the light of liquidity-easing measures by the RBI. The open market operations by the central bank were concentrated on securities maturing up to 2037. Tools such as dollar/rupee buy/sell swaps and daily and long-term variable rate auctions brought down overnight money market rates, impacting short-term gilts the most.

The RBI's focus on improving liquidity conditions was seen by traders as a precursor to a rate cut. For most traders, the base case was the rate-setting panel cutting the repo rate to 6.25% and announcing further measures to infuse durable liquidity. The durable liquidity in the banking system was at a deficit of (-) INR 401.02 billion as on Jan. 10, a first since July 2019.

Expected measures include a calendar for open market operation purchases as well as more dollar/rupee buy/sell auctions. However, some traders also expect the RBI to avoid announcing further liquidity measures after already notifying INR 600 billion worth of gilt buys at open market operation auctions and picking up over INR 300 billion worth of gilts on the secondary market until Jan. 24.

"Announcing a VRR auction which will reverse around the next MPC looks like a signal that now they have provided liquidity support which will last one policy cycle and will now focus on something (a rate cut) which they have been pushing since October's MPC," a dealer at a state-owned bank said. 

Though the liquidity conditions have improved, some traders fear that the depreciating currency could delay the rate cut. After hitting a lifetime low of 87.5825 a dollar during the day, the rupee ended Thursday at a record closing low of 87.5775 a dollar. A depreciation in the currency raises fears of inflation in imported products like crude oil. Moreover, traders were unsure about what to expect from the commentary of RBI Governor Sanjay Malhotra and RBI Deputy Governor Rajeshwar Rao as they would be attending their first meeting of the Monetary Policy Committee.

Some caution ahead of the meeting's outcome lowered the trading volumes from Wednesday. The market turnover Thursday was INR 471.85 billion, against INR 623.85 billion the previous day, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trades using the wholesale digital rupee pilot, against two trades worth INR 100 million Wednesday.

OUTLOOK

On Friday, gilt prices may open steady on caution before the monetary policy outcome at 1000 IST, dealers said. During the day, gilt prices will take cues from the RBI governor's statement. Most traders expect the rate-setting panel to cut the repo rate by 25 bps. Traders will also look for cues regarding the future trajectory of rates from the stance the rate-setting panel assumes.

Dealers said prices will also be sensitive to any announcement of liquidity-easing measures. Traders will also track the movement of US yields after the US employment report for January showed that initial claims for state unemployment benefits rose 11,000 to 219,000 for the week ended Saturday.

Traders will also remain cautious about the movement of the rupee against the dollar after the record closing low of 87.5775 a dollar Thursday. Market participants will also eye US President Donald Trump's comments on future tariffs.

Bonds may also take cues from crude oil prices. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.60-6.70% during the day.

India Gilts: Most bonds in thin band; traders look for value across curve

MUMBAI--1618 IST--Prices of most bonds traded in a thin band ahead of the Reserve Bank of India's Monetary Policy Committee meeting outcome on Friday. While gilts maturing in 10 years and below had largely priced in a repo rate cut, long-term bond prices surged as traders found spreads lucrative after they widened over the past two weeks, dealers said.

Bonds maturing over 30 years had "under-performed" earlier this week as traders rushed to buy bonds maturing up to 10 years, which were expected to gain the most from a rate cut and liquidity-easing measures of the RBI. While mutual funds and life insurers had been consistent buyers through the week, traders also picked up the long-term paper realising the potentially larger price movement in these bonds with a rate cut, dealers said. The price appreciation of long-term bonds is much greater per basis point fall in yield due to their longer terms of maturity.

Despite the caution, volumes were robust due to traders picking up off-the-run bonds and papers usually not traded heavily in the secondary market, looking for the greatest value after a rate cut. For most traders, the base case was the MPC would cut rates by 25 basis points to 6.25% and announce further measures to infuse durable liquidity. A minority expects a 50 bps cut, while some don't expect a cut at all.

Traders, likely from private and foreign banks, hedged their purchases of illiquid and varied-tenure bonds by placing short bets on the most-traded 6.79%, 2034 bond, dealers said. "The (6.75%) 2029 bond and the (7.32%) 2030 bond have a spread of around 5 basis points itself, so traders would prefer the lesser-traded 2030 bond instead of the usual short-term papers," a dealer at a state-owned bank said.

The benchmark 10-year was not seen gaining by as much as some bonds in the shorter and longer durations. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data at 1511 IST showed trades worth INR 96.13 billion in the 6.79%, 2034 gilt, a higher than usual amount.

The market turnover was INR 415.65 billion, against INR 573.85 billion at 1630 IST Wednesday, 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 6.63-6.69%.  (Cassandra Carvalho)

India Gilts: Remain slightly up on fall in US yields, hopes of rate cut Fri

MUMBAI--1250 IST--Prices of government bonds remained slightly higher owing to an overnight slump in US Treasury yields and expectations of a policy repo rate cut at the Reserve Bank of India's Monetary Policy Committee meeting's outcome Friday, dealers said. Some profit booking, likely by state-owned banks, and caution ahead of the MPC outcome limited the gains.

The yield on the 10-year US Treasury note was at 4.44% at 1040 IST from 4.48% at the close of Indian market hours Wednesday. Traders expect foreign portfolio investors to continue picking up gilts on account of easing US yields and hopes of a rate cut by the MPC. In the week to Wednesday, foreign investors have bought INR 144.49 billion worth of gilts under the fully accessible route, Clearing Corp. of India data showed.

The Indian rupee falling to a record low against the dollar also led to some selling pressure in the 10-year benchmark, 6.79%, 2034 gilt and other short-tenure papers, dealers said. The rupee hit a lifetime low of 87.5700 against the dollar Thursday, and traders are concerned the sharp fall in the currency may make the RBI rethink a rate cut. The central bank's intervention in the foreign exchange market through dollar sales to support the falling rupee drains systemic liquidity. The central bank's three members on the MPC could skip voting for a rate cut and instead push through additional measures to infuse durable liquidity, dealers said.

Meanwhile, resuming the momentum from Wednesday, long-term bonds were up sharply on demand from mutual funds and life insurers. "There is a lot of room in the long-tenure bonds to appreciate as they have been underperforming for a while now," a dealer at a primary dealership said. Between Jan. 24 and Tuesday, the 40-year gilt yield's spread over the 10-year yield had widened by 9 bps to 39 bps. 

"Hopes of a rate cut have led to a pickup in demand for these securities as investors anticipate a capital appreciation," the dealer said. In the case of a rate cut, traders expect a bull-steepening of the yield curve, where the fall in the yields of short-tenure gilts will be sharper than long-tenure bonds. However, the price appreciation of long-term bonds is much greater per basis point fall in yield due to their longer terms of maturity.

During the day, traders expect the price of the 10-year benchmark gilt to remain in a tight range as there are no significant cues scheduled ahead of the MPC outcome Friday. The market turnover was INR 243.85 billion, against INR 256.85 billion at 1130 IST Wednesday, 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 6.63-6.69%.  (Vidhushi RajPurohit)

India Gilts: Up on fall in US ylds; PSU banks' sales, rupee fall cap gains

MUMBAI--0955 IST--Prices of government bonds were up tracking an overnight fall in US Treasury yields. Gains were capped as the rupee hit a fresh low against the dollar, and state-owned banks sold bonds at a profit, dealers said.

US Treasury yields fell after the service Purchasing Managers' Index compiled by the Institute for Supply Management slid to 52.8 in January from 54 in December in the US. US Treasury Secretary Scott Bessent's comments of focussing on lowering the 10-year US Treasury yield over the Federal Reserve's short-term benchmark rate also aided the fall in yields, dealers said.

Domestic bond prices opened higher but some gains were erased immediately as the 10-year gilt yield was near 6.65%, which led to profit-taking. "PSUs (state-owned banks) are profit-booking right now but overall position is long, the 6.65% level is good to sell," a dealer at a state-owned bank said.

Some selling pressure due to the fall of the rupee to a record low also limited the gain in prices, dealers said. The rupee hit 87.56 against the dollar at 0940 IST. The depreciating local currency soured some hopes of a rate cut by the Reserve Bank of India's Monetary Policy Committee at the outcome of its three-day meeting on Friday, due to concerns on imported inflation and further currency weakness after a rate cut. The bond market has priced in 80-90% chances of a rate cut this week, dealers said. 

As price movement was limited due to caution ahead of the MPC outcome, traders took advantage of widening spreads between tenures, with hopes that the spreads would compress after a rate cut. The 7.32%, 2030 paper was the third-most traded paper in the secondary market, as some traders bought short-term bonds, whose yields are more sensitive to rate cuts, and sold the 10-year benchmark paper, dealers said.  

The market turnover was INR 127.70 billion, higher than INR 92.40 billion as at 0930 IST Wednesday, 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 6.63-6.69%.  (Cassandra Carvalho)

India Gilts: Seen tad up on fall in US ylds; caution likely before MPC outcome

MUMBAI – Prices of government bonds are seen opening slightly higher on Thursday, tracking an overnight fall in US Treasury yields, dealers said. US yields fell after services data for January in the US was softer than expected. However, caution before the outcome of the Reserve Bank of India's Monetary Policy Committee meeting on Friday may limit volatility in bond prices, dealers said. 

The yield on the 10-year US Treasury note fell overnight to 4.42% at 0749 IST from 4.48% at the close of Indian market hours Wednesday. US yields fell after the service Purchasing Managers' Index compiled by the Institute for Supply Management slid to 52.8 in January from 54 in December in the US. The data pointed to signs of weakness in the world's largest economy, after US jobs data Tuesday showed that job openings declined more than the consensus estimates, indicating a slight slowdown in the US labour market. The US 10-year yield fell to its lowest since Dec. 18 after the data, coupled with easing fears of tariff-related inflation.

On the domestic front, the softening in US yields may lend positive cues to gilt traders, which may be furthered by traders' expectations of a rate cut by the MPC on Friday. The MPC's three-day meeting began Wednesday, and if it announces a rate cut Friday, it would be the first cut since May 2020. Traders may continue to place short bets on the benchmark 10-year gilt to pick up either short-term or long-term bonds, due to rate cut bets and lucrative spreads, as seen this week, dealers said. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data at 0800 IST showed trades worth INR 107.32 billion in the 6.79%, 2034 gilt.

During the day, traders, especially primary dealerships, may trim portfolios in light volumes to make space for bonds at Friday's auction, dealers said. The government will sell INR 120 billion of the 6.92%, 2039 bond and INR 100 billion of the 7.09%, 2054 bond on Friday, after the outcome of the MPC meeting.

The movement of the rupee against the dollar may also lend cues to bond prices. On Wednesday, bond prices rose on rate cut bets and a fall in US yields, but gains were capped as the rupee hit a fresh low of 87.4875 against the dollar. The depreciating local currency reduced some traders' expectations of a rate cut this week, dealers said.  (Cassandra Carvalho) 

End

US$1 = INR 87.5775

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

Edited by Rajeev Pai

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2025. All rights reserved.