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Informist, Thursday, Mar. 13, 2025

By Srijita Bose

MUMBAI – Government bond prices ended on a mixed note. Long-term bonds rose as traders looked to maximise gains, expecting bond yields across maturities to fall after their April rate cut view was bolstered after a lower-than-expected inflation print on Wednesday, dealers said. However, the 10-year benchmark bond's price fell as traders placed short bets in the liquid security to pick up higher yielding bonds.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.65, or 6.70% yield, against INR 100.75, or 6.68% yield, Wednesday. The 10-year gilt underperformed through the day as traders were disappointed with its absence at the Reserve Bank of India's next gilt buy, as was expected. The RBI will buy six government bonds worth INR 500 billion through an open market operation auction Tuesday. It will buy the 7.10%, 2029; 7.26%, 2032; 7.26%, 2033; 7.73%, 2034; 7.40%, 2035 and 7.41%, 2036 bonds.

"Everybody is already heavy on the 10-year and since they are getting better yield in corporate bonds and state bonds, they are going there," a dealer at a primary dealership said. "There are also switches happening in illiquid bonds, and mutual funds are selling the 10-year to go for long-term bonds."

Traders said price gains in bonds maturing in above 15 years would exceed those of bonds maturing in less than 10 years, even if short-term bond yields fall more. The RBI's Monetary Policy Committee is expected to cut rates for the second consecutive time in April after India's February CPI inflation fell to a seven-month low of 3.6% on Wednesday, dealers said. Demand from insurers, mutual funds as well as foreign banks was seen in these papers, they said.

After the RBI's INR-500-billion OMO auctio buy on Wednesday, and with another coming up, banks also looked to pick up higher yielding, illiquid bonds to replace the gilts being sold to the RBI, largely from 'held-to-maturity' books. Banks had already picked up a sizeable chunk of state and corporate bonds for their portfolios, especially in the state government securities during the weekly auctions of around INR 500 billion each in the last two weeks. The 10-year state bond fetches a spread as high as 58 basis points over the 10-year gilt yield this week, against a peak of 49 bps at the end of February.

Optimism on long-term bonds has picked up, with life insurers looking to lock in current yields as returns are expected to fall starting April, both due to rate cuts and an on-year fall in gilt supply. Traders expect the government's Apr-Sept borrowing calendar to pull down the share of 30-50 years' gilts to less than 35%, from 37.3% in FY25, citing feedback that insurers and banks had given to the RBI. In place of long-term bonds, the share of bonds maturing in under seven years should increase, where demand is expected to remain firm as the RBI's rate-setting panel cuts rates and liquidity conditions ease, dealers said.

"There is some expectation in the market that long-term bond supply will come down, it makes sense for RBI to do so since it will keep buying momentum in the market after the rate cut, " a dealer at private bank said. "Also once liquidity improves in April, we will see some rally in short-term and belly (of the yield curve) too."

Domestic traders have already placed significant bets on gilts maturing up to 10 years, and refrained from adding to their exposure, dealers said. They were of the view that the yields would not fall sharply before the year ending Mar. 31, as liquidity conditions in the banking system are expected to remain in a deficit despite the RBI continually injecting liqudity, dealers said. 

Outflows owing to payments for both direct and indirect taxes during the month could keep liquidity in deficit or near neutral till March end. According to data from the RBI, the net liquidity injected by the central bank--a proxy for systemic liquidity conditions – was at INR 1.38 trillion on Wednesday. Advance tax outflows are expected to drain up to INR 2.5 trillion from the banking system by early next week. 

Banks focused on credit disbursals for year-end reporting and also sought to book profit on their bond portfolios, with traders citing the "March effect" for the lacklustre movement in gilt prices despite positives adding up on both the rate view and demand-supply, dealers said. State-owned banks likely sold at a profit as the yield on the 10-year gilt neared 6.68%, dealers said. 

Meanwhile, yield on the 10-year US Treasury note rose to 4.34% from 4.30% at 0900 IST on Thursday, which limited gains on the 15-year bonds, dealers said. However, the rise in yields did not deter foreign banks and investors from picking up gilts, betting on a series of rate cuts in India, dealers said. FPIs bought over INR 10 billion worth gilts through the fully accessible route, data from Clearing Corp. of India at 1800 IST showed. 

The marketwide turnover for the day was INR 315.00 billion, down from INR 428.15 billion Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades using the wholesale digital rupee pilot Thursday, same as on Wednesday.

OUTLOOK

Money markets are shut on Friday for Holi. On Monday, gilt prices are likely to take cues from the movement on US Treasury yields at opening. An ease in liquidity conditions could intensify April rate cut bets, with further bets on rate cuts in June or August also in traders' minds.

Traders may also assess developments related to US tariff policy and the rupee's movement against the dollar, dealers said. Crude oil prices could also be a trigger if they move significantly. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.72% during the day.

India Gilts: Mixed; long-term bonds in favour, traders short-sell 10-yr gilt

MUMBAI--1555 IST--Long-term government bonds remained in favour as traders looked to maximise gains, expecting bond yields across maturities to fall after their April rate cut view was bolstered by a lower-than-expected inflation print on Wednesday, dealers said. However, the price of the 10-year benchmark bond was down as traders placed short bets to pick up other high-yielding bonds.

Traders were also dispppointed that the 6.79%, 2034 bond was excluded from the open market gilt puchase auction by the Reserve Bank of India on Tuesday. State-owned banks were likely to have sold the bond at a profit as the yield neared 6.68%, dealers said. Traders had already placed significant bets on the 10-year gilt, and with the view that the yield on the paper would not fall sharply before the year ending Mar. 31, preferred to pick up other bonds.

"People already have heavy positioning on 10-year, and the belly (bonds maturing in 7-15 year) segment does not look very good right now, although spread trades are happening and 15-year is showing some gains because of that," a dealer at a private bank said. "Long-term are doing well because people were already light on them before and demand from insurers is also coming in there."

Incremental buying demand from banks also remained muted as they focused on cedit disbursals for year-end reporting, dealers said. Meanwhile, even as the expected rate cut in April may pull down short-term bond yields more than yields on long-term gilts, the price appreciation of these bonds is likely to be greater due to their longer duration of maturity, dealers said. The yield on the 7.34%, 2064 bond fell to 7.05%, down 11 basis points from a nine-month high 7.16% on Mar. 4. 

"The CPI data is out, and the market is widely expecting a 25-basis-point repo rate cut in April but the positioning for that is still not kicking in because traders are occupied with their books closing (at year-end)," a dealer at a state-owned bank said. "Gradually, we might see an uptick in trading activity as the yield (on the 6.79%, 2034) bond needs to ease to 6.55-6.60% before the repo rate is cut down to 6.00%."

Dealers also await systemic liquidity to improve before they start positioning for a policy repo rate cut in April. According to data from the RBI, the net liquidity injected by the central bank--a proxy for systemic liquidity conditions—was at INR 1.38 trillion on Wednesday. Advance tax outflows are expected to drain up to INR 2.5 trillion from the banking system by early next week.

The market-wide turnover was INR 264.20 billion, compared with INR 250.75 billion at 1530 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 6.65-6.70%.  (Srijita Bose and Vidhushi RajPurohit)

India Gilts: Most steady; traders prefer bonds maturing in over 10 yrs

MUMBAI--1008 IST--Prices of government bonds were steady as an April rate cut was priced in after the benign CPI inflation print for February, dealers said. Bonds maturing above 10 years were in favour as traders looked to take advantage of the greater price movement in those bonds when yields fell, as they are expected to do over the next few weeks, they said.

The 15-year benchmark 6.92%, 2039 bond's yield spread over the 10-year yield narrowed to 14 basis points, from 19 bps seen last week. The bond had outperformed the 6.79%, 2034 gilt on Wednesday as well as banks sought to replace bonds sold to the Reserve Bank of India at the INR-500-bln OMO buy auction.

"Spreads are narrowing in the belly of the curve, even in 20 years plus, so that segment is looking better right now," a dealer at a private bank said. "And in long term, because of the expectations of reduced supply, there's more demand there."

Traders expect the supply of long-term bonds, maturing in 30-50 years, to come down in the Apr-Sept borrowing calendar from 38.6% in Oct-Mar. Traders sought to take advantage of the spread of the 40-year gilt yield over the 10-year yield near 40 bps, expecting to sell the bonds at a profit in Apr-Jun when long-term bond demand may exceed supply, dealers said. Insurers' demand had also picked up in March after being underwhelming since October, they said.

State-owned banks remained on the selling side, having been the net sellers of gilts in the secondary market for the past two days, dealers said. Until aggressive purchases from their end began, to refill their books after sales at the Reserve Bank of India's open market purchase of gilts through auction, bond yields were unlikely to soften further this month, dealers said. 

The market-wide turnover was INR 72.30 billion, compared with INR 54.20 billion at 1030 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 6.65-6.70%. (Cassandra Carvalho and Aaryan Khanna)

India Gilts: Seen tad up as India's Feb CPI print lower than expected

MUMBAI – Prices of government bonds are seen opening a tad higher after data showed India's CPI inflation for February was lower than expected, dealers said. However, elevated US Treasury yields may temper the gains.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.70%, compared with 6.68% on Wednesday. The momentum from a softer-than-expected CPI print may help sustain a rise in bond prices, dealers said. Bond prices ended higher on Wednesday after India's CPI inflation for February came in at 3.6%, lower than traders' expectations of a print between 3.7% and 4.2%. With the print below the Reserve Bank of India's medium-term target of 4%, traders bet on another 25-basis-point cut in the repo rate to 6.0% in April. However, the gains on Wednesday were capped as core CPI printed at a 15-month high of 4.0%.  

Post market hours on Wednesday, the RBI announced the purchase of six government bonds worth INR 500 billion through an open market operation auction on Tuesday. The central bank has offered to buy the 7.10%, 2029; 7.26%, 2032; 7.26%, 2033; 7.73%, 2034; 7.40%, 2035 and 7.41%, 2036 bonds at the auction. Some traders may exit the benchmark 10-year gilt as they had picked up stock of the highly liquid paper earlier this week on expectations that the RBI would offer to buy it on Tuesday.

The yield on the benchmark 10-year US Treasury note was at 4.30% at 0800 IST, unchanged from 1700 IST Wednesday. According to data released post market hours on Wednesday, US CPI inflation rose 2.8% on year in February, lower than The Wall Street Journal's median estimate of 2.9%. Despite the cooler-than-expected data, US yields remained elevated on fears that subsequent inflation prints would be higher due to the impact of US President Donald Trump's imposition of tariffs on imports. 

Indian equity and money markets will be shut on Friday on account of Holi. Ahead of the holiday, trade volumes may be low Thursday as some traders may be on leave. (Cassandra Carvalho)

End

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

Edited by Deepshikha Bhardwaj

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