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Informist, Wednesday, May 7, 2025

By Aaryan Khanna

NEW DELHI – Government bond prices ended higher in the face of continuous volatility after a flare-up in tensions between India and Pakistan on Wednesday. Traders picked up bonds on the hope that there would be no further escalation in tensions between the two nuclear powers, and looked ahead to rate cuts in India, dealers said.

The 6.79%, 2034 bond ended at INR 103.17, up from INR 103.07 on Tuesday. The 10-year benchmark yield ended at 6.34%, against 6.35% on Tuesday. Price gains were not significant as caution about the geopolitical situation prevailed, though the two-way trade led to a rise in bond market volumes.

Indian armed forces launched a military operation early Wednesday against nine sites in Pakistan and Pakistan-occupied Kashmir from where terrorists were suspected to be operating, the Indian defence ministry said in a statement. Through the day, further comments from Indian and Pakistani officials were closely watched. Reports of retaliatory firing from Pakistani and threats of attacks led to prices dipping, but ultimately the consesus view remained that India's strike would not be a precursor to a widespread conflict. 

"The market expected yields to actually rise after the aggression," a dealer at a state-owned bank said. "I think people are expecting that this is going to be the end of the escalation, and things will die down from here. There is also a lot of buying, replacement demand, when prices fall."

Gilts had fallen slightly for a few minutes after opening flat, before reversing losses. The 6.79%, 2034 bond's price first recovered all losses by 0913 IST, and remained higher than the previous close through the day after 1023 IST.

Traders said they had largely expected a retaliatory strike from India to the Pahalgam terrorist attack on Apr. 22, which claimed 26 lives, and the details of the attack suggested that further escalation and widespread conflict was unlikely. Three dealers said the overhang of the retaliation, and the geopolitical tensions, were now at an "end".

After the strike, potential negatives for gilts such as fiscal expansion or a chance of rate cuts were put off the table by dealers. Traders were speculating that escalation in tensions could lead to the Reserve Bank of India's Monetary Policy Committee reconsidering sharp rate cuts, should the rupee depreciate. Gilt prices gave up most gains after the rupee slid to the day's low of 84.9300 a dollar, though the dip was bought into quickly, dealers said. 

However, state-owned banks were constant buyers of the 6.79%, 2034 gilt at the 10-year benchmark gilt's yield rose above 6.35%, dealers said. Replacement demand from banks buoyed gilt prices, after the Reserve Bank of India's slew of gilt purchases through open market operations, including one for INR 500 billion on Tuesday. Traders look forward to the three auctions worth INR 750 billion left in May, after which focus will be on the central bank's dividend to the government, they said. IDFC FIRST Bank in a note Tuesday forecast the dividend to be INR 2.6 trillion-INR 3.0 trillion on the back of large foreign exchange operations carried out by the central bank.

Mutual funds were also likely to have been on the buying side, possibly betting on bond yields to fall further following more rate cuts until the repo rate fell to 5.50% from the current 6.00%. Though the view had been entrenched for around a month now, dealers said the 10-year gilt yield would reflect it only when it falls to 6.25%. Yields on short-term bonds fell more than the 10-year gilt on the view. The yield spread of the 10-year benchmark gilt over the five-year benchmark 6.75%, 2029 gilt widened to 30 bps on Wednesday from 27 bps Tuesday.

Long-term investors such as life insurance companies kept to the sidelines, as did foreign portfolio investors, with bonds maturing above 10 years underperforming short-term gilts. Some traders had expected foreign investors to sell gilts, but FPIs did not act in large sizes and some foreign banks were likely buyers, dealers said. Moreover, traders did not want to add duration risk to their portfolios until the air was clear on further military operations by either India or Pakistan.

"When such situations occur, it is largely a trader's market," a dealer at a primary dealership said. "Insurers and FPIs were very quiet today, though PSUs (state-owned banks) were showing their muscle pretty early on."

Meanwhile, there was uncertainty in the market about the impact of the nation-wide civil defence mock drills scheduled for Wednesday, with Mumbai being one of the designated districts for drills. There were no disruptions to bank treasuries or trading platforms even after the mock drills were reportedly being conducted in other parts of Mumbai after 1600 IST, dealers said.

The turnover in the gilts market rose to INR 900.00 billion Wednesday from INR 583.60 billion on Tuesday, 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 Thursday, government bond prices may closely track any developments in military activity between India and Pakistan after India's airstrikes on Pakistan-controlled territory on Wednesday. Any further military action between the two countries may lead to a fall in prices, and the 10-year gilt yields may trend towards 6.40% as traders would be caught wrong-footed, after expecting de-escalation, dealers said.

Demand for bonds maturing between 2028 and 2039 is seen robust as banks look to replenish stocks of bonds in similar maturities sold to the RBI at open market opeation auctions. These bonds may be in favour during the day even if tensions between the two neighbours remain high.

Gilts may also take direction from the movement in US Treasury yields and crude oil prices overnight. The movement in US yields after the US Federal Open Market Committee's rate decision at 2330 IST will be closely watched. While the widepsread expectation is that the panel will hold rates, traders await US Federal Reserve Chair Jerome Powell's comments on US tariff polices after the outcome, they said.   

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 Monetary Policy Committee. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.31-6.40% on Thursday.

India Gilts: Remain up on PSU bks', MFs' buys on hopes of deep rate cuts

MUMBAI--1553 IST--Government bond prices remained up in a volatile session as state-owned banks and mutual funds likely bought gilts due to persisting hopes of deeper rate cuts during the year, dealers said. Gilts turned jittery and gave up some gains earlier after reports of heavy shelling by Pakistan along the Line of Control in Jammu and Kashmir in retaliation to Indian airstrikes in Pakistan. A fall in rupee to the day's low of 84.93 against the dollar also dragged down gilt prices. 

"There is a risk-off sentiment and caution on what could happen next, so traders may be frontrunning because yesterday (Tuesday) some covering was there," a dealer at a primary dealership said. "I don't think there is going to be a situation of a full-fledged war...but even if there is some escalation from current scenario, RBI (Reserve Bank of India) will do its work, and liquidity and rate cut view remains positive."

Pakistan's Prime Minister Shehbaz Sharif authorised retaliation to India's military operation early Wednesday at nine sites in Pakistan and Pakistan-occupied Jammu and Kashmir from where terrorists were suspected to be operating, media reports said. These reports led prices to give up some gains. However, investors bought gilts as they continued to focus on hopes of a deeper rate-cut cycle and found gilts attractive to buy as prices dipped. Some traders also said that a sharp escalation in the conflict from current situation was unlikely, spurring buys in gilts. 

Traders said they preferred liquid bonds as they wished to stay invested in gilts due to strong rate cut views even as fears over escalating tensions between India and Pakistan persisted. Longer tenure bonds underperformed as traders trimmed their holdings in longer duration bonds and picked up gilts maturing within five years, dealers said. Long-term investors such as insurers and pension funds bought gilts maturing in over 30 years as they found yields lucrative to hold amid hopes of a deeper rate-cut cycle, dealers said. The yield spread on the 30-year benchmark 7.09%, 2054 gilt over the 10-year benchmark 6.79%, 2034 gilt is currently at 45 basis points and dealers expect the spread to squeeze by 3-4 bps by June as more rate cuts get priced in.

Volumes in the gilt market were INR 688.30 billion at 1530 IST, higher than INR 423.60 billion at the same time Tuesday, 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 6.30-6.38%.  (Srijita Bose)

India Gilts: Remain up; caution continues as traders await Pakistan response

MUMBAI--1359 IST--Prices of government bonds remained up as traders dialled down expectation of a further escalation in tensions between India and Pakistan. However, gains were capped and caution will continue to prevail in the market this week as traders will watch how Pakistan responds to India's airstrikes early Wednesday, dealers said.

The government held a press briefing at 1030 IST about its military operation early Wednesday against nine sites in Pakistan and Pakistan-occupied Kashmir from where terrorists were suspected to be operating from. Traders said the outcome was of no major significance to gilt prices since it did not highlight Pakistan's possible reaction to the strikes. The briefing hinted that India would not take further action without any steps from Pakistan and retaliation from the neighbours was seen unlikely by the market, dealers said.  

"The (gilt) market is stuck," a dealer at a private bank said. "There was nothing much from the press conference. The onus is now on Pakistan. Traders were already light going into this and there's a thought that there will be no more escalation."

Replacement demand from banks buoyed gilt prices, after the Reserve Bank of India's slew of gilt purchases through open market operations. Traders look forward to the three auctions worth INR 750 billion left in May, after which focus will be on the central bank's dividend to the government, they said. IDFC FIRST Bank in a note Tuesday forecast the dividend to be INR 2.6 trillion-INR 3.0 trillion on the back of large foreign exchange operations carried out by the central bank.

State-owned banks were likely booking profits when the yield on the 10-year benchmark 6.79%, 2034 gilt fell below 6.35%. State-owned banks were buyers in early trade Wednesday as they locked in higher yields when the yield on the 10-year neared 6.37%. Mutual funds were also buying gilts, dealer said. Dealers speculated that a primary dealership or private bank covered short bets aggressively earlier in the day, helping prices recover from the day's lows. 

Gains were limited as traders were on edge as they awaited some clarity on Pakistan's reaction to the airstrikes, dealers said. Some traders were also cautious ahead of the US Federal Open Market Committee's rate decision at 2330 IST. While a rate cut is not expected at this meeting, traders will await US Federal Reserve Chair Jerome Powell's comments on US tariff polices, they said.  

Volumes in the gilt market were INR 539.45 billion at 1230 IST, sharply higher than INR 304.10 billion at the same time Tuesday, 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 6.32-6.36%. (Cassandra Carvalho)

India Gilts: Reverse losses; strong buys on rate cut hopes

MUMBAI--0941 IST--Government bond prices rose in early trade Wednesday, reversing losses at the open as traders quickly overcame nervousness after news that India had attacked nine terror bases in Pakistan and Pakistan occupied Kashmir. The attractive yield on the 10-year gilt spurred buying, given that further rate cuts are on the anvil, dealers said. Traders also awaited further updates from the defence ministry, which will brief the media on 'Operation Sindoor' at 1030 IST, they said.

"Looks like some short-covering is there at these levels, " a dealer at a private sector bank said. "Poeple were already expecting something like this and were light on their holding...if you do not consider the (geopolitical) tensions part, then sentiments are positive because of rate cuts (expectations)."

Indian armed forces launched a military operation early Wednesday against nine sites in Pakistan and Pakistan-occupied Kashmir from where terrorists were suspected to be operating, the Indian defence ministry said in a statement. Traders had expected prices would fall due to this. However, while prices fell, buying interest came in as expectations of deeper rate cuts by the Reserve Bank of India's Monetary Policy Committe during the rest of the year outweighed the impact of the latest news.

Ample liquidity and the Reserve Bank of India's open market operations auction purchases of bonds also spurred buying, mainly in gilts maturing in eight to 15 years, dealers said. State-owned banks bought gilts as banks looked to replenish stocks of bonds in similar maturities sold to the RBI at OMO auctions. Traders also covered short bets placed earlier in the week as the yield on the 10-year benchmark 6.79%, 2034 gilt rose briefly above 6.36%. 

Moody's Ratings late Tuesday cut India's GDP growth projection for 2025 by 20 basis points to 6.3%, citing heightened global policy uncertainty and trade restrictions. This also helped supported traders' rate cut bets. News that India and the UK had agreed on a free trade agreement also aided buying interest, dealers said.

Volumes in the gilt market were INR 152.10 billion at 0930 IST, higher than INR 78.95 billion at the same time Tuesday, 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 6.32-6.40%.  (Srijita Bose)

India Gilts: Seen dn, may be volatile as India strikes Pakistan terror bases

MUMBAI – Government bond prices may open lower Wednesday due to escalation of tensions between India and Pakistan after the former launched air stikes on terror camps in Pakistan and Pakistan-occupied Kashmir. Traders will also look out for further updates from the defence ministry, which will brief the media on 'Operation Sindoor' at 1000 IST, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.34-6.41% during the day. On Tuesday, the 10-year gilt closed at INR 103.07, or 6.35% yield. 

"Market will be jittery today (Wednesday), and people will wait for what is to happen next," a dealer at a primary dealership said. "But some strong buying should come in at 6.38-6.40% (yield on the 10-year benchmark gilt)."

Traders will be tracking the progress of civil defence mock drills scheduled for Wednesday, which may also disrupt trading. The Centre has asked states to conduct civil defence mock drills 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. Though the schedule for the mock drills is not entirely clear, trade volumes may be thin during the day, dealers said. Traders may avoid large bets ahead of the outcome of the US Federal Open Market Committee's meeting, due later Wednesday.

Demand for gilts maturing within five years may rise as traders will look to cut down their holdings of longer-duration papers to reduce risks on fears on rising geopolitical tensions between the two nuclear-armed countries. Meanwhile, views on deeper rate cuts persisted, which could also lead to demand for shorter-tenure gilts as traders expect further steepening in the yield curve. 

Demand for bonds maturing in seven to 15 years could be seen as banks will look to replenish stocks of bonds in similar maturities sold to the Reserve Bank of India at open market operation auctions. Some traders may also prefer long-term bonds due to continued investment demand from life insurers and on expectations that the yield spread on these bonds over the 10-year gilt could narrow down further on rate cut hopes.  (Srijita Bose)

End

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

Edited by Avishek Dutta

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