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Informist, Tuesday, May 6, 2025

By Aaryan Khanna

NEW DELHI – Government bond prices ended sharply lower Tuesday as traders trimmed their gilt holdings on concerns over a rise in tensions between India and Pakistan, which may threaten both India's fiscal situation and expected rate cuts, dealers said. Investors were keen to pick up the 10-year benchmark 6.79%, 2034 gilt as the yield rose above the psychologically crucial 6.35% mark, which limited losses. 

The 6.79%, 2034 bond ended at INR 103.07, down from INR 103.26 Monday. Its yield ended 3 basis points higher at 6.35%, reversing gains from Monday.

Reports of the government ramping up its preparedness against hostilities after market hours on Monday spooked gilt traders. The Centre has asked states to conduct civil defence mock drills on Wednesday to check preparedness against potential hostile attacks. The directive from the home ministry comes amid escalating tensions with Pakistan following the terrorist attack in Pahalgam in Kashmir on Apr. 22, which left 26 people dead.

The bond market has priced in 50-bps of further rate cuts by the Reserve Bank of India's Monetary Policy Committee, including at the next meeting on Jun. 4-6, and an escalation threatens that assumption, dealers said. Meanwhile, additional spending on defence and other expenses in case of a wider conflict would also be a negative for gilts, they said. There have been reports of border skirmishes between the two neighbours over the last 10 days.

"In case of an escalation, the rupee will fall and the RBI may not be able to cut rates immediately," a dealer at a primary dealership said. "If nothing changes, a rate cut is obvious. So it's difficult to position in such a binary situation, and traders are nervous."

Gilt prices opened little changed ahead of two key auctions before the selling pressure hit the market early in the day. Foreign portfolio investors were likely sellers throughout the day, with foreign banks likely selling for both clients and on their proprietary books. Clearing Corp. of India data showed marginal FPI sales in fully accessible route bonds at 1800 IST. Protracted tensions between India and Pakistan would keep foreign investors at bay, even as the market is not expecting a full-fledged war to break out between the two nuclear-armed neighbours, dealers said.

Moody's Ratings on Monday said India's macroeconomic conditions are likely to remain stable even if tensions with Pakistan increase, though the rating agency accounts for persistent flare-ups but not outright conflict. As long as the view of rate cuts remains intact, traders are keen to buy gilts even with the "risk-off mood", especially when the 10-year gilt yield rose above 6.35%, dealers said. State-owned banks were likely the largest buyers Tuesday, with some mutual funds and life insurers also likely taking advantage of the fall in prices, they said.

Traders said demand-supply conditions are extremely favourable for gilts, which would prevent a sharp fall in prices as state-owned banks are looking to replenish the bonds sold to the RBI at the open market operation purchases since January. The RBI is scheduled to buy gilts worth over INR 5.25 trillion through auctions and the secondary market between January and May, nearly matching the gilt supply of INR 5.60 trillion during the period. 

In such a situation, banks turned to bonds issued by state governments. At the state bond auction Tuesday, the RBI set a cut-off for the Andhra Pradesh 10-year state bond at 6.71%, against 6.72% seen in an Informist poll. The auction results had limited impact on gilt prices during the day, though the prices did tick up briefly as traders readjusted their portfolios after missing out on some bonds at the auction, dealers said.

Meanwhile, cut-off prices on four of the seven bonds at the INR-500-billion OMO auction were largely in line with expectations in an Informist poll. State-owned banks said they had not tendered the illiquid gilts at a significant discount from the indicative levels by Financial Benchmarks India Ltd. Monday, other than accounting for the fall in gilt prices on Tuesday.

However, the cut-off prices on the 8.32%, 2032 bond, 7.18%, 2033 and 7.10%, 2034 bonds – the most liquid among those on offer and the three with the largest outstanding amounts – were sharply lower than the poll. Dealers said they were more aggressive in tendering these gilts from their held-to-maturity books to book profits, and did not sell these from their trading portfolios.

"Selling the 10-year bonds is always attractive, you have a large standing stock of it," a dealer at a state-owned bank said. The erstwhile 10-year benchmark 7.10%, 2034 bond was the most bought by the RBI, at over INR 100 billion. "While some banks would always prefer to dump illiquid bonds, in a situation when yields are going down, I think there is a case to be made to hold onto the high-yielding bonds within HTM (held-to-maturity portfolio)."

Dealers had initially expected the OMO cut-offs to be the deciding factor for the movement of bond prices in the second half of the day, but they had little impact on the market. Traders continued to be wary of the external environment, and some also cited the upcoming US Federal Open Market Committee rate decision at 2330 IST Wednesday as a reason for avoiding aggressive bets, dealers said.

The turnover in the gilt market fell to INR 583.60 billion Tuesday, lower than INR 863.85 billion Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. After six straight days of no trades, there were two trades in the 7.10%, 2034 bond using the wholesale digital rupee pilot worth INR 100 million.

OUTLOOK

On Wednesday, government bond prices may closely track any developments in India-Pakistan relations. A rise in tensions between the two countries may lead to a fall in prices, and the 10-year gilt yields may trend towards 6.40%, dealers said.

Traders will be tracking the progress of the civil defence mock drills scheduled for Wednesday. Trading may also be disrupted due to the drills, though the schedule is not entirely clear, dealers said. Traders may avoid large bets ahead of the US FOMC outcome after market hours.

Demand for bonds maturing between 2028 and 2039 is seen as robust as banks look to replenish stocks of bonds in similar maturities sold to the RBI at OMO auctions. 

These bonds may be in favour during the day. Some traders also preferred long-term bonds due to continued investment demand from life insurers, with limited impact of the ongoing border tensions unless there is an escalation, dealers said. Others were looking to trim their duration risk.

Gilts could take cues from US yields if they move sharply. India's provisional GDP growth estimates for Jan-Mar and 2024-25 (Apr-Mar), due at the end of May, could be the next big trigger for gilts. Despite geopolitical uncertainty, gilt yields are expected to remain below 6.40% as investors will look to buy gilts on the hope of further rate cuts by the RBI's rate-setting panel. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.31-6.40% on Wednesday.

India Gilts: Remain down; OMO auction results in line with expectations

MUMBAI--1532 IST--Prices of government bonds remained sharply down and were little changed after the results of the state bond auction and the Reserve Bank of India's open market purchase of gilts through auction. Traders were cautious and refrained from aggressive purchases on fears of rising tensions between India and Pakistan, dealers said. 

"All eyes are tracking the India-Pakistan border," a dealer at a private sector bank said. "We don't know the extent of the impact and we are looking at tomorrow's (Wednesday's) mock drills to see what happens."

Cut-off prices at the INR-500-billion OMO auction were largely along expected lines, but failed to lift prices. Dealers had initially expected the OMO cut-offs to be the deciding factor for the movement of bond prices in the second half of the day. The central bank accepted the largest quantum of the 7.10%, 2034 gilt, as was expected. Cut—off prices were lower than those indicated by Financial Benchmarks India Pvt. Ltd., which was expected since prices in the secondary market fell Tuesday. 

Foreign banks were selling gilts after the home ministry asked states to hold civil defence mock drills on Wednesday.  Some state-owned banks and long-term investors, such as insurers, took advantage of hardening yields to purchase gilts on the hopes of a deeper rate cut cycle in 2025. Some others were on the sidelines and were waiting for the yield on the benchmark 10-year 6.79%, 2034 gilt to rise above 6.35% before purchasing bonds. 

The market-wide turnover was lower than recent days as a "risk-off" sentiment prevailed in the market. Traders continued to trim stock of longer-term gilts and purchase short-term papers to reduce their exposure to risk amidst the geopolitical uncertainty. Dealers also took advantage of yield differentials between gilts to book profits, they said. The yield of the 6.33%, 2035 bond--which was issued by the central government Friday--offered a spread of 4 basis points over the benchmark 10-year 6.79%, 2034 gilt and was the second-most traded paper after the benchmark on the RBI's Negotiated Dealing System-Order Matching platform. 

Volumes in the gilt market were INR 423.60 billion at 1530 IST, lower than INR 615.20 billion at the same time on Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the remainder of the day, the yield on the 6.79%, 2034 bond is seen at 6.32-6.38%. (Cassandra Carvalho)

India Gilts: Sharply dn on rise in India-Pakistan tensions; OMO results eyed

MUMBAI--1237 IST--Government bond prices were sharply down as traders reduced their gilt exposure on fears of an escalation in tensions between India and Pakistan, dealers said. Traders also placed intraday short bets as they awaited the result of the INR 500 billion open market operation auction. Results of the OMO auction and the state bond auction could dictate movement in gilts later in the day, dealers said. 

"There should not have been such a drastic reaction in prices, but risk appetite is now poor for FPIs (foreign portfolio investors), so they are selling," a dealer at a private sector bank said. "But some value buying and intraday trading is also there...after cut-offs (results of the auctions), prices (in the secondary market) could rise."

Foreign banks and FPIs likely sold gilts in the secondary market to trim their holdings on fears of rising tensions between India and Pakistan, dealers said. However, state-owned banks likely bought gilts in the secondary market as they found yields lucrative to hold on hopes of a deep rate-cut cycle, thereby limiting the fall in prices, they said. Traders are likely to bid less aggressively at auctions after fall in secondary market prices. Banks also participated at the state bond auction to refill their held-to-maturity books after selling at the Reserve Bank of India's OMO auctions, they said. Traders had varying views on cut-off prices at the OMO auction, with some expecting them at more than a 20 paise discount to market prices, while others hoping for cut-offs on a par with prevailing market prices. 

Meanwhile, insurers and pension funds picked up gilts maturing in over 30 years as well as state bonds at the auction as they found yields lucrative going into a deeper rate cut cycle, dealers said. Traders expect the yield spread of the 7.34%, 2064 bond over the 10-year benchmark 6.79%, 2034 gilt to compress by another 4-5 basis points from nearly 47 bps currently. 

Volumes in the gilt market were INR 258.20 billion at 1230 IST, lower than INR 367.50 billion at the same time Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the remainder of the day, the yield on the 6.79%, 2034 bond is seen at 6.30-6.36%.  (Srijita Bose)

India Gilts: Down on fears of escalating India-Pakistan tensions

MUMBAI--0944 IST--Government bond prices fell Tuesday as traders feared an escalation in tensions between India and Pakistan after reports said that India's home ministry had ordered mock civilian drills to prepare for any air attacks, dealers said. Traders awaited the INR 500 billion open market operations auction by the Reserve Bank of India and the auction of state government bonds. 

"The market fell, likely due to India-Pakistan news. Some profit-booking could also be there," a dealer at a state-owned bank said. "But because of this, I don't see any impact in the auction cut-offs, both should be good...and if there is no further development during the day, the upside to yields should be contained at 6.35-6.36% (yield on the 10-year 6.79%, 2034 benchmark gilt)." 

Banks are likely to participate the most at the OMO auction, as they will look to sell from their held-to-maturity books at greater profits, dealers said. Some dealers expect the previous 10-year benchmark, the 7.10%, 2034 gilt to be tendered the most by banks, and the cut-off price for the bond is expected to be closer to the secondary market price. Banks are also likely to tender the rest of the bonds at the auction largely from their held-to-maturity books at prevailing market prices or at lower discounts than at earlier OMO auctions, dealers said. Some dealers also said the 8.32%, 2032 bond could be tendered the most by banks as it is less liquid in the secondary market. The bond has an outstanding of INR 1.08 trillion. 

At the state bond auction, there is demand from banks to replace bonds tendered to the RBI at the OMO auctions, dealers said. Demand from long-term investors such as insurers and pension funds is also seen firm at the auction, they said. 

Volumes in the gilt market were INR 78.95 billion at 0930 IST, slightly higher than INR 73.55 billion at the same time Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the remainder of the day, the yield on the 6.79%, 2034 bond is seen at 6.28-6.36%.  (Srijita Bose)

India Gilts: Seen steady before INR 500-bln OMO auction

MUMBAI – Government bond prices are seen steady ahead of an open market auction on Tuesday, at which the Reserve Bank of India has offered to buy INR 500 billion worth of gilts, as well as a state bond auction. Gilt prices may take cues from the results of both auctions later in the day, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.28-6.36% during the day. On Monday, the 10-year gilt closed at INR 103.26, or 6.32% yield. 

"OMO auction should be mostly good. Now, it is to be seen whether PSUs (state-owned banks) actually give the bonds near market levels or take the cut-off lower," a dealer at a private bank said. "Today, there could be some pressure in long bonds because of state bonds (auction) but good demand should come in (at the auction)."

At the auction, the RBI has offered to buy the 7.06%, 2028, the 6.10%, 2031, the 8.32%, 2032, the 7.18%, 2033, the 7.10%, 2034, the 7.40%, 2035, and the 7.23%, 2039 gilts. Traders expect the previous 10-year benchmark, the 7.10%, 2034 gilt to be tendered the most by banks and the cut-off price for the bond is expected to be closer to the secondary market levels. Banks are also likely to tender the rest of the bonds at the auction largely from their held-to-maturity books at prevailing market prices or at lower discounts than seen previously, dealers said.

With over INR 4.00 trillion of buys through open market operations already completed in 2025 and another INR 1.25 trillion scheduled in May, banks will not be aggressive in seeking to book profits, dealers said. Moreover, the outlook for bond yields is positive and liquidity has turned comfortable, reducing the incentive to sell bonds below secondary market prices, they said.

Demand for gilts maturing in seven to 15 years could also pick up as banks will look to buy them in place of bonds that the RBI bought through OMO auctions, dealers said. Meanwhile, demand for shorter-tenure gilts maturing within five years could remain firm during the day on expectations of further steepening in the yield curve due to expectations of rate cuts, and as traders look to cut down longer-duration papers to reduce their risks amid persisting geopolitical tensions between India and Pakistan, they said.

Meanwhile, demand for longer tenure gilts could take a beating due to the increased supply of state bonds at the auction Tuesday, dealers said. At the auction, states will look to raise INR 230 billion, against INR 205 billion indicated in the Apr-Jun borrowing calendar for states. Though demand at the auction is seen firm from long-term investors such as insurers and pension fund houses, dealers said prices of long-term bonds could fall in the secondary market.  (Srijita Bose)

End

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

Edited by Saji George Titus

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