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Informist, Friday, Feb. 21, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds across most tenures ended only slightly lower, and the benchmark 10-year 6.79%, 2034 gilt recovered most losses, as state-owned banks' purchases offset a fall from a weaker-than-view gilt auction result, dealers said. Long-term bond prices, however, were sharply down, but trade volumes in these tenures jumped up, as long-term investors looked to lock in higher yields.

The 6.79%, 2034 bond ended at INR 100.58, or 6.71% yield, against INR 100.59, or 6.70% yield, Thursday. Price action remained dull Friday, as seen the entire week, as even the auction result failed to lend a clear direction to bond prices. Caution before the minutes of the Reserve Bank of India's Monetary Policy Committee's February meeting along with a possible announcement of more open market purchase of gilts also deterred traders from placing aggressive bets, dealers said.

The surprise of the day was that the RBI did not partially devolve the 6.98%, 2054 green bond on primary dealership, which is what market participants had expected at the auction. Instead, the central bank accepted bids worth the full notified amount at a cut-off yield of 7.11%, 2 basis points higher than the prevailing yield of the 30-year benchmark 7.09%, 2054 bond in the secondary market.

The green bond was dealt in the secondary market only after the auction result, and its volume totalled INR 7.50 billion in the secondary market as life insurers sought the gilt. Such was the scramble for the bond that its price ended 36 paise higher than the cut-off of INR 98.41 at the auction, and its yield fell below the 30-year benchmark's.

"He (the RBI) can't afford to do this (accept bids at high yields) with a 10-year green bond but since this is a 30-year gilt and everyone bid low, he would've allowed it," a dealer at a state-owned bank said. "You won't get this yield so everyone's rushing to take advantage of it."

The fall in long-term bond prices was beneficial to long-term investors such as pension funds and insurance companies, which have been waiting for cheaper valuations to buy these papers, dealers said. Spreads between the benchmark 10-year gilt and long-term gilts widened, offering a good bargain to long-term investors. The spread between the 7.34%, 2064 paper and the benchmark 10-year gilt is at 40 basis points, the highest level since the 40-year paper was first issued in April 2024. Bargain hunters across market segments, especially state-owned banks looking to refill their held-to-maturity portfolios, have been waiting for term premiums to rise. The RBI has bought nearly INR 1 trillion worth of gilts under open market operations since Jan. 30, and most of this stock was offered from held-to-maturity books of state-owned banks, dealers said.

State-owned banks were more proactive in picking bonds Friday after the poor auction result. Hardening bond yields made it lucrative for them to pick up gilts, and some replacement demand for their held-to-maturity books was picking up, dealers said. Some state-owned banks expect the yield on the benchmark 10-year gilt to hit 6.75% by the end of the month. Illiquid bonds, which have been favoured this month at a time when liquid bonds were seen too richly priced, were the top traded papers before the gilt auction result. The 7.30%, 2053 paper was the third-most traded paper on the secondary market earlier in the day, as some banks picked up stock for their held-to-maturity books since its offered a yield of around 7.08%, higher than the 7.05% yield level observed on the 7.09%, 2054 gilt early in the day, dealers said. 

At the auction, state-owned banks and insurers bid for the green bond and the 2064 papers, dealers said, while private banks dominated the bidding for the five-year gilt. Demand for bond forward-rate agreements and Separate Trading of Registered Interest and Principal of Securities was lower than expected, at around INR 20 billion, one of the reasons why the 40-year benchmark gilt's cut-off price was lower than expected, dealers said.

In the secondary market, state-owned banks' purchases limited losses after the auction result. Some private banks were also on the buying side, for their asset and liability management, dealers said. Foreign portfolio investors were also purchasing gilts. FPIs bought gilts worth INR 18.18 billion Friday through the fully accessible route, according to data from Clearing Corp. of India at 1820 IST. Dealers have been speculating that FPIs are moving to domestic banks to carry out their investments, which is why despite trade volumes being low, FPIs have been active in the bond market.

Traders awaited the minutes of the MPC's February meeting, with a focus on the comments of RBI Governor Sanjay Malhotra as this was his first MPC meeting since being appointed as the head of the central bank. Friday, market participants also paid more attention to comments of RBI Deputy Governor M. Rajeshwar Rao. Rao was given charge of the monetary policy department after former deputy governor Michael Patra's term ended on Jan. 14.

Traders initially expected Rao to be a member of the MPC only for the February meeting, and speculated that Chief Economic Adviser V. Anantha Nageswaran was the main front-runner for the position of deputy governor. However, the government on Thursday announced that Nageswaran's term of office was extended for two years till March 2027. Expectations of Rao sitting at the MPC's April meeting have increased, with no new appointee seen taking office until then.

The market turnover was INR 251.90 billion, compared to INR 293.30 billion Thursday, 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, against none on Thursday. 

OUTLOOK

Gilts are not traded on Saturday. On Monday, government bonds are likely to take cues from the movement of US Treasury yields after the release of US economic data over the weekend, along with market participants' interpretation of the MPC minutes. 

Bond prices may fall Monday after data released Friday showed that the RBI did not buy or sell gilts in the secondary market in the week ended Feb. 14. This was the second straight week the central bank has not bought or sold in the secondary market after buying gilts worth INR 388.15 billion through screen-based secondary market purchases in January. So far, the RBI also hasn't announced any OMO auction, while traders were expecting a press release on the same, post market hours. Traders have bet on at least INR 600 billion more worth of gilt purchases through auction by the RBI in the Jan-Mar quarter.

Market participants will closely assess any statements by US President Donald Trump on tariffs and their potential impact on global trade. Crude oil prices could also be a trigger if they move significantly, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.68-6.75% during the day.

India Gilts: Tad dn as auction cut-offs lower-than-view; green bond trade up

MUMBAI--1607 IST--Prices of government bonds were a tad down after the cut-off prices on all three bonds at the INR 340-billion gilt auction were below traders' expectations, dealers said. The impact on the 10-year benchmark 6.79%, 2034 gilt was limited as the papers were all in either shorter or longer tenures and not heavily traded.

The cut-off price on the 6.75%, 2029 bond was INR 100.27 against an Informist poll estimate of INR 100.32, while that on the 7.34%, 2064 bond was INR 102.92 against INR 103.01. The surprise for bond traders was the cut-off price on the 6.98%, 2054 green bond. The bond was expected to be partially devolved on primary dealerships, or the Reserve Bank of India rejecting some bids. Instead, the RBI accepted bids worth the full notified amount at a cut-off yield of 7.11%, 2 basis points higher than the prevailing yield of the 30-year benchmark 7.09%, 2054 bond in the secondary market 

"Market expectation was that auction cut-off (prices) would be below market. The only surprise is that RBI accepted (bids for) the green bond, and at a higher yield," a dealer at a state-owned bank said.

The 2054 green bond's volumes picked up in the secondary market trade after the auction. Dealers said the high yield was lucrative to lock in, and traders exited other long-term bonds in the secondary market to pick up the gilt. With all the bonds largely being held to maturity and a lack of liquidity only a minor concern, the 2054 green bond and its higher yield was preferred to the 7.09%, 2054 benchmark, dealers said.

State-owned banks and insurers bid for the green bond and the 2064 papers, dealers said, while private banks dominated the bidding for the five-year gilt. Demand for bond forward-rate agreements and Separate Trading of Registered Interest and Principal of Securities was lower than expected, at around INR 20 billion, one of the reasons why the 40-year benchmark gilt's cut-off price was lower than expected, dealers said.

State-owned banks were picking up bonds in the secondary market as prices fell, limiting losses. With disappointing cut-off prices in the last two weekly auctions, the yield on the benchmark 10-year gilt may touch 6.75% by month-end, dealers said. However, the lack of gilt supply after February may prevent the yield from climbing sharply, they said.

Should the RBI announce more open market purchases through auction after market hours Friday, as traders expect, the supply-demand mismatch may lead to a rise in gilt prices Monday, dealers said. Comments from the central bank's Monetary Policy Committee may also lend cues after the minutes of the February policy review are released after market hours.

At 1630 IST, the market turnover was INR 216.80 billion, compared with INR 219.55 billion at the same time on Thursday, 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 6.65-6.73%.  (Cassandra Carvalho)

India Gilts: In thin band ahead of auction result; demand seen modest

NEW DELHI--1235 IST--Government bond prices traded in a thin band ahead of the result of the weekly gilt auction. Demand for bonds is seen modest, and the earlier enthusiasm for the 6.75%, 2029 bond faded as banks were seen demanding higher yields while bidding at the auction, dealers said.

The government offered to sell INR 140 billion of the 2029 bond, INR 50 billion of the 6.98%, 2054 green bond, and INR 150 billion of the 7.34%, 2064 bond at 1030-1130 IST. With the large chunk of the five-year benchmark on offer, liquidity in deficit and market activity muted, traders demanded higher yields for the bonds on offer. Even replacement demand from state-owned banks was not directed towards the five-year bond after they sold 2030-2037 maturing bonds to the Reserve Bank of India at open market operation auctions over the last two weeks, dealers said.

"We are bidding at around INR 100.32 (for the 6.75%, 2029 bond). Initially we thought it would sail through, but we are not getting much enthusiasm from the market," a dealer at a state-owned bank said. "The stock sold to the RBI at the OMO auction will be replaced only by state bonds, because people have sold papers (that had) over 7% yield."

Insurance firms and pension funds were seen as the primary bidders for the 2054 green bond and the 2064, as was usual. However, traders speculated that life insurers' collections were not robust and with the significant supply, cut-off prices would be sharply lower than Thursday's close. Some bonds maturing in 30 years fell sharply in the secondary market ahead of the auction result, with traders expecting a negative surprise from the cut-off. Demand for Separate Trading of Registered Interest and Principal of Securities and bond forward-rate agreements from contracts with primary dealers and foreign banks may contribute to around INR 40 billion of demand. However, with INR 150 billion on offer, the demand from investors may not help improve the cut-off unless a large state-owned life insurer buys gilts in a large quantum, dealers said.

"I am actually a bit surprised by the feedback we are getting on papers, investors are not buying at all," a dealer at a private bank said. "There are no negative cues, but there aren't too many positive cues either I would say. Maybe activity will pick up after the minutes today (Friday), or after GDP data comes out."

The minutes of the Monetary Policy Committee's February meeting are scheduled at 1700 IST. Comments on growth and inflation from the six-member panel are closely watched after it cut the policy repo rate by 25 basis points to 6.25% earlier this months. RBI Governor Sanjay Malhotra's comments would be particularly important to gauge the interest rate trajectory in India after his first monetary policy review as RBI chief, dealers said. India's GDP data for Oct-Dec next week is also awaited.

The market turnover was INR 56.75 billion, compared with INR 64.90 billion at 1230 IST Thursday, 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 6.65-6.73%.  (Aaryan Khanna)

India Gilts: Steady before INR 340-bln bond auction

MUMBAI--1018 IST—Government bond prices were in a thin band due to caution ahead of the INR 340-billion gilt auction, dealers said. Traders kept to the sidelines due to lack of other triggers for gilt prices.

"Market is waiting for the auction and not much movement will happen now," a dealer at a state-owned bank said. "Some move can be seen depending on the auction, but mostly the five-year (6.75%, 2029) paper will see good demand."

At the auction, the government will sell INR 140 billion of the 6.75%, 2029 bond, INR 50 billion of the 6.98%, 2054 green bond, and INR 150 billion of the 7.34%, 2064 bond. Demand for the 2029 gilt is seen firm, particularly from state-owned banks, as they look to replace bonds sold to the Reserve Bank of India at its open market purchase of gilts through auction on Thursday, dealers said. With the central bank conducting three variable rate repo operations on Friday, including one for 45 days, some positivity on short-term gilts is expected.

Meanwhile, traders are unsure of the demand for long-term bonds. Unlike green bonds of shorter tenures, the 30-year green bond is not expected to be devolved or the bids rejected by the RBI. However, demand for the green bond will be eroded by the presence of the 40-year benchmark gilt at the auction, dealers said. Since life insurers prefer higher yielding state bonds, the cut-off prices for both bonds may be well below Financial Benchmark India Ltd. levels for Thursday.

With the RBI showing proactivity on liquidity, traders expect it to announce another tranche of open market operation auctions to buy gilts after its January liquidity measures are all complete, and banking system liquidity is still in deficit. Should the announcement not come today, as traders expect, prices may fall on Monday, dealers said. Minutes of the Monetary Policy Committee's February meeting, in which the panel cut the repo rate, are also awaited for interest rate cues, dealers said.

The market turnover was INR 19.60 billion, compared with INR 28.60 billion at 0930 IST Thursday, 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 6.65-6.73%.  (Srijita Bose)

India Gilts: Seen steady before INR 340-bln auction

MUMBAI – Government bonds are seen opening steady due to caution ahead of an INR 340-billion gilt auction at 1030-1130 IST, dealers said. Traders will take cues from the results of the auction later in the day.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.73%, compared to 6.70% on Thursday. The disappointment after poor cut-offs at Thursday's open market purchase auction of gilts by the Reserve Bank of India could, however, drag prices of the benchmark down more than other bonds during the day, dealers said. 

Meanwhile, prices of short-term bonds could rise after the RBI rejected all bids for 91-day and 182-day Treasury bills at Thursday's auction. This was the first time in nine years that the central bank rejected bids at the 182-day T-bill auction and nearly two years since it last rejected all bids at the 91-day auction. However, with pressure on liquidity amid the ongoing goods and services tax outflows and advance tax payments due later in the month, the rise could be limited, dealers said. 

With the RBI announcing three variable rate repo operations on Friday, some positivity is likely. The RBI will conduct a 45-day variable rate repo auction for a notified amount of INR 750.00 billion between 1200 IST and 1230 IST Friday. It will also conduct a three-day variable rate repo auction worth INR 1.75 trillion as part of its daily auctions, and a 14-day variable rate repo auction worth INR 750.00 billion to ease liquidity in the banking system. Bets on the RBI announcing another tranche of OMO auctions Friday might lead traders to pick up gilts, dealers said.

Traders also await minutes of the Monetary Policy Committee's meeting in February, due at 1700 IST, for comments by RBI Governor Sanjay Malhotra, for whom it was the first MPC meeting, dealers said. Traders will also pay close attention to the RBI's weekly statistical supplement for data on whether the RBI bought gilts on-screen in the week ended Feb. 14.

Meanwhile, the benchmark 10-year US Treasury yield fell to 4.50% at 0815 IST from 4.53% at 1700 IST on Thursday after data showed initial jobless claims in the US were higher than expected in the week ended Saturday. Dealers, however, said that the impact of the fall in US yields would be limited on gilts as foreign portfolio investors largely remain absent, awaiting clarity on the tariff policies of US President Donald Trump. 

(Srijita Bose)

End

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

Edited by Ashish Shirke

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