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Informist, Tuesday, Mar. 4, 2025

By Srijita Bose

MUMBAI – Government bond prices ended slightly lower, reversing early gains, after traders picked up state bonds at the largest bond auction so far in the financial year 2024-25 (Apr-Mar) at higher-than-expected cut-off yields, dealers said. Prices rose in early trade on a sharp overnight fall in US Treasury yields.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.31, or 6.74% yield, against INR 100.35, or 6.74% yield, Monday. While the gilt's price had risen to as high as INR 100.48 earlier in the day, traders shed their holdings to pick up higher-yielding state bonds, dealers said.

Fourteen states raised INR 505 billion at the auction, the full notified amount. The auction was seen sailing through, but traders would have the opportunity to demand higher returns for bonds maturing in more than 10 years, dealers said. However, some bidders faced technical issues with the e-Kuber system which was slow in processing bids. When bidding was first stopped at 1130 IST, the scheduled end of the auction, some banks and primary dealerships had not been able to place the entirety of their proprietory or client bids. When these traders took up the issue with the Reserve Bank of India, warning of disastrous cut-off yields, the central bank reopened bidding for the state bond auction until 1215 IST, dealers said. While extensions for bidding due to technical glitches are par for the course, reopening of bidding after it had closed had not occurred in the last few years, they said.

With the confusion and turmoil around the state bond auction, several traders took the opportunity to place bids at higher yields around 1200 IST, dealers said. This led gilt prices to give up most gains after the bidding ended a second time. The result showed the spread of 10-year state bond yields over the 10-year benchmark gilt widened to 47-60 basis points from 46-49 bps last week. Cut-off yields on the five-year and 14-year state bonds at auctions were also near the higher end of traders' cut-off estimates, according to an Informist poll.

"To begin with, the auction quantum was so big, plus cut-offs were really bad in some of the papers, even for shorter tenures some papers saw higher cut-offs," a dealer at a private bank said. "Prices did not fall immediately because some short-covering was also there, but overall market sentiments gave away all the gains."

Gilt prices rose earlier as the yield on the 10-year benchmark US Treasury note fell to 4.16%, from 4.26% at 1700 IST Monday. While the fall may have led some foreign portfolio investors to pick up gilts in light volumes, buying momentum did not pick up further as domestic traders stayed mostly on the sidelines, dealers said.

Some traders were surprised that the 10-year US yield fell below the crucial 4.20% mark without much support, and covered short bets on gilts early in the day. However, while the 10-year US yield has fallen over 30 bps in the past seven days, domestic traders have not bought gilts because of the uncertainties on the global front. US President Donald Trump's tariffs on Mexico, Canada and China--its top three trading partners--came into effect Tuesday, and traders were worried about the the growth-inflation impact on India should the situation escalate into a trade war, dealers said.

Banks have also kept incremental gilt investments light, focusing on higher yielding state and corporate bonds and diverting cash from improved liquidity conditions to meet credit demand at the year-end. March is traditionally the month when the cash buffers of banks are the tightest, and with advance tax outflows of around INR 1.5 trillion mid-month, seasonal drain in currency in circulation, and demand for credit, the deficit is expected to widen sharply without the RBI's support. 

"Till there is a surplus in liquidity on a durable basis, that visibility will not come to traders to go out and buy bonds," a dealer at a primary dealership said. "Even in shorter-tenure gilts, steepening is not playing out properly across the curve due to the illiquidity premium."

Liquidity conditions improved Tuesday with some expecting the liquidity deficit, a constant since December, to come down to near-neutral. This was due to the settlement of the three-year dollar/rupee buy/sell swap worth $10 billion conducted by the RBI, dealers said. Though part of the proceeds is expected to be a rollover of the central bank's previous forward balances, the net liquidity infusion may be around INR 450 billion-INR 500 billion, they said. Monday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--eased slightly to INR 1.10 trillion, the least in three weeks.

Demand for short-tenure paper rose, though traders are awaiting further clarity on what liquidity measures the RBI would take in March, including another open market purchase of gilts. The last auction to buy bonds was on Feb. 20, and RBI data show it had not bought any gilts in the secondary market between Jan. 31 and Feb. 21.

The market-wide turnover was INR 300.75 billion, slightly higher than INR 203.50 billion Monday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trades made using the wholesale digital rupee pilot against two trades worth INR 100 million Monday.

OUTLOOK

On Wednesday, government bond prices may take cues from overnight movement in US Treasury yields. Market participants will closely assess any statements by President Trump on tariffs and their potential impact on global trade. A possible global trade war could ensue as China has slapped tariffs back on the US after the latter imposed additional 10% tariff on Chinese goods Tuesday. This could lead to a rise in inflation, which could cause central banks across the globe to refrain from cutting rates.

Gilt prices may trade in a narrow range as domestic traders await clarity on whether the RBI would further infuse liquidity after its dollar/rupee buy/sell swap was settled Tuesday and aided banking system liquidity, dealers said. US February employment data, included non-farm payrolls Friday, may be the next trigger for gilts, they said.

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: Little changed; state bond auction see weak demand as expected

MUMBAI--1630 IST--Prices of government bonds were little changed after the result of the INR 505-billion state bond auction drew weak response, dealers said. Bond prices had already erased most gains due to the heavy supply of state bonds and expectations that cut-off yields would be higher than earlier expected.

The focus of banks on deploying funds towards credit disbursals, from investing has also led to dampening of buying momentum in gilts market. However, improved liquidity conditions in the banking system kept prices of gilts maturing within 10 years afloat.  

"Dealers were awaiting the (state bond) auction result so that led to some downward momentum, as there was caution consdering the large amount. But the auction saw relatively good bidding which kept the prices supported," a dealer at a state-owned bank said. "In the gilts market, there is not much momentum right now as is usual at year-end where banks need to focus more on their lending figures."

The spread between the 10-year state bonds and 10-year benchmark 6.79%, 2034 gilt widened to 47-60 basis points, from 46-49 bps last week. Assam's 10-year bond was auctioned at the cut-off of 7.34%. The gilt market did not show any signficant reaction to the result, with traders returning to sidelines as banks were focused on year-end lending, dealers said.

Improvement of systemic liquidity after the government's month-end spending and the scheduled inflows from the settlement of the central bank's dollar/rupee buy/sell swap auction on Tuesday led to some demand in the short-tenure papers--the 6.75%, 2029 bond and 6.79%, 2031 bond, dealers said. On Monday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit—was at INR 1.10 trillion. However, dealers said that the liquidity conditions are still not stable owing to the upcoming tax outflows on account of tax deducted at source, excise duty and advance tax payments.

The marketwide turnover was INR 268.15 billion, compared with INR 167.35 billion at 1630 IST 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 6.70-6.75%.  (Vidhushi RajPurohit)

India Gilts: Off highs before state bond auction result; bidding sees glitch

MUMBAI--1345 IST--Prices of government bonds were off highs ahead of the result of the INR 505-billion state bond auctions, with technical glitches during bidding likely to have driven up cut-off yields, dealers said. Gilts held onto some gains due to a sharp overnight fall in US Treasury yields.

Some banks and primary dealerships faced issues in bidding for state bonds at the second largest auction on record at 1030-1130 IST. Bids were going through slowly on the Reserve Bank of India's e-Kuber platform and with a lag, leading to some primary dealerships missing out on placing all their bids before 1130 IST, dealers said. The bidding window shut at 1130 IST but was later re-opened, until 1215 IST.

The auction bidding was marked by confusion as several dealers were unaware of the resumption of bidding even around 1200 IST. The notification on the resumption of bidding on the e-Kuber platform was also delayed. If the state bond bidding had closed at 1130 IST, it would have drawn poor demand and sharply higher-than-expected cut-offs for the second largest debt sale on record, as several large client orders remained with primary dealerships, dealers said.

"It was not that demand was spectacular in the first place at the auction," a dealer at a private bank said. "With the bidding disruption, it would have exacerbated the issue and we could see wild cut-off (yields) today (Tuesday). But all the bids have been placed now, so hopefully it won't be that bad."

The ease in liquidity to near-neutral on Tuesday led to an increase in trading volumes, which may rise further after the auction result, dealers said. Short-term state bonds are expected to have received good demand from traders as the liquidity conditions have eased slightly, particularly for Gujarat's five-year paper on offer. On Monday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit—was at INR 1.10 trillion, and the settlement of the central bank's dollar/rupee buy/sell swap auction on Tuesday is scheduled to add around INR 870 billion in rupee liquidity to the banking system.

However, traders expect the spread between the 10-year benchmark 6.79%, 2034 gilt and the states' 10-year bonds to widen to over 50 basis points, from 46-49 bps last week. The large supply of 14-year bonds could also put pressure on gilt prices of similar tenures, particularly as banks look to trim liquid gilts and pick up higher yielding state bonds for their held-to-maturity portfolios. As for long-term state bonds maturing in above 20 years, life insurers may look to meet their requirements at the end of the financial year, particularly as yields have risen so far in Jan-Mar and become more attractive to lock in.

Gilt prices were up earlier due to the overnight fall in US yields, which sustained during Indian market hours Tuesday. The yield on the benchmark 10-year US Treasury note fell to 4.16%, from 4.26% at 1700 IST Monday. Poor US manufacturing data and a rush to haven assets after the Donald Trump administration began imposing tariffs on top trade partners led to US yields slumping, dealers said.

The marketwide turnover was INR 147.70 billion, compared with INR 71.65 billion at 1330 IST 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 6.70-6.75%.  (Vidhushi RajPurohit and Aaryan Khanna)

India Gilts: Up on fall in US yields; INR 505-bln state bond sale awaited 

MUMBAI--1011 IST--Prices of government bonds were up, tracking an overnight fall in US Treasury yields, dealers said. Traders await a INR 505-billion state bond auction at 1030-1130 IST for further cues on price movement. 

The yield on the benchmark 10-year US Treasury note fell to 4.14% at 0800 IST from 4.26% at 1700 IST Monday. US yields fell overnight after US manufacturing data came in lower than expectations, adding to a string of recent economic data that point to slowing growth in the world's largest economy. Additionally, investors fled to safe haven assets such as US government debt as fears of repercussions of tariffs triggered a sell-off in equity markets, dealers said. US President Donald Trump's tariffs on Mexico, Canada, and China are set to come into effect from Tuesday.    

The gains were capped as traders trimmed portfolios to make room to pick up state bonds at the auction later in the day. The notified quantum of the auction is higher than the indicated amount of INR 403.50 billion stated in the calendar of market borrowing by states for the Jan-Mar quarter. State-owned banks are expected to be major participants at the auction, as they look to refill their 'held-to-maturity' books after the Reserve Bank of India purchased around INR 1 trillion worth of largely-illiquid stock through open market operation auctions in Jan-Feb. Traders expect spreads between gilts and state bonds to widen by 3-5 basis points, with those between long-term bonds expected to be higher. 

"PSU banks will be there because of all their HTM sales, and liquidity is also better," a trader at a primary dealership said. "Let's see what the cut-offs are like, accordingly gilt prices will react. "In long-term state bonds, I'm not too sure of insurance demand."

Inflows from the RBI's three-year $10-billion dollar/rupee buy/sell swap auction held on Friday will also boost systemic liquidity Tuesday, when its settlement will add around INR 870 billion to the banking system. RBI data showed that the net liquidity injected by the central bank--a proxy for the systemic liquidity deficit--stood at INR 1.10 trillion on Monday. Trade in the secondary gilt market is expected to pick up because of the boost, dealers said.

The marketwide turnover was INR 70.00 billion, compared with INR 23.20 billion at 1030 IST 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 6.70-6.75%.  (Cassandra Carvalho)

India Gilts: Seen up on fall in US ylds; heavy state bond supply may weigh

MUMBAI – Prices of government bonds are seen opening higher tracking an overnight fall in US Treasury yields, dealers said. Heavy supply of state bonds at the auction Tuesday may offset gains in gilt prices, as traders may trim stock of gilts to make room for state bonds. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.72-6.76%, compared with 6.74% on Monday. The yield on the benchmark 10-year US Treasury note fell to 4.14% at 0800 IST, from 4.26% at 1700 IST Monday. US yields fell overnight after US manufacturing data printed lower than expectations, adding to a string of recent economic data that points to slowing growth in the world's largest economy. Additionally, investors fled to safe haven assets such as US government debt as fears of the repercussions of tariffs triggered a sell-off in equity markets, dealers said. US President Donald Trump's imposition of tariffs on Mexico, Canada, and China are set to go into effect Tuesday.    

Despite the fall in US Treasury yields, gains in gilt prices are seen limited. Tight liquidity conditions have added to weakening demand for bonds, and traders are unlikely to place any aggressive bets until the beginning of 2025-26 (Apr-Mar), dealers said. Any gains in prices due to purchases by foreign portfolio investors may be offset by traders booking profits nearing the year-end, as seen Monday. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors.

Traders may also trim stock of gilts to make room to pick up state bonds at the INR 505-billion auction to be held at 1030-1130 IST. The notified quantum of the auction is higher than the indicated amount of INR 403.50 billion stated in the calendar of market borrowing by states for the Jan-Mar quarter. Prices of long-term gilts are likely to be the most sensitive to the heavy supply of state bonds. Spreads between gilts and state-bonds are expected to widen by 3-4 basis points Tuesday, furthered by reduced appetite from long-term investors such as insurance companies and pension funds. During the day, bond prices may also track the movement of the rupee against the dollar, along with the movement of swap rates.  (Cassandra Carvalho)

End

US$1 = INR 87.27

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

Edited by Rajeev Pai

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