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Informist, Thursday, May 8, 2025

By Vidhushi RajPurohit and Srijita Bose

MUMBAI - Government bond prices ended sharply lower Thursday following an escalation in tension between India and Pakistan, dealers said. The 10-year benchmark gilt yield rose by 6 basis points, the most in a day since Jan. 13. Prices had risen earlier in the day on expectations of a thaw in tension between the two neighbours but fell after reports of further escalation and tracking a fall in the rupee. 

The 6.79%, 2034 bond ended at INR 102.74, sharply down from INR 103.17 on Wednesday. The 10-year benchmark yield ended at 6.40%, the highest closing level since Apr. 15. Gilt prices fell sharply as some stop-losses were hit near 6.36% yield on the 10-year benchmark gilt on reports of an escalation in tensions, dealers said. An intraday fall in the rupee also triggered the selling of gilts, which pulled down prices. 

"It's a war-like situation, and nobody can say what will happen and where the market will go," a dealer at a private sector bank said. "Everyone is selling right now, there's an auction tomorrow (Friday) and then the long weekend after that, and things can quickly escalate."

The Indian government said the armed forces Thursday morning targeted air defence radars and systems in Pakistan and neutralised at least one air defence system in Lahore in retaliation for Islamabad's attempt to target military establishments in northern and western India. Traders who had earlier hoped for tensions between the two nuclear-armed neighbours to de-escalate after India's airstrikes on Wednesday dumped gilts to reduce their exposure to geopolitical risk, dealers said. 

Most state-owned banks, which were earlier looking to buy gilts if the yield on the 10-year gilt touched 6.36-6.38%, sold bonds as uncertainty on the geopolitical front mounted, they said. However, some state-owned banks bought gilts as the yield neared 6.40%, which limited the fall in prices, they said.

Private sector banks and some foreign banks also sold gilts to reduce their exposure in case the situation between the two neighbouring countries worsens further, dealers said. Traders expect the yield on the 10-year benchmark gilt to rise to 6.42-6.45% if there is further escalation in border tensions. Traders also refrained from accumulating gilts until there is some thaw in tensions. 

Long-term gilts remained out of favour due to the greater risk of price depreciation in these papers, dealers said. Meanwhile, some traders were picking gilts maturing in 5 years and below due to the lower risk in liquidating the papers, they said. At the weekly gilt auction on Friday, traders also expect less demand for the 6.90%, 2065 bond for the same reason.  

"No one wants to have papers of long maturity right now as there is so much uncertainty, but with short-tenure gilts at least we can sell them quickly if needed," a dealer at a state-owned bank said. 

Gilt prices were up in the early trade as dealers were of the view that there would be no further escalation in tensions between India and Pakistan, dealers said. However, after reports of a rise in tension, traders started pricing in potential negatives for gilts, such as fiscal expansion. 

Some traders also said a further fall in the Indian rupee could lead the Reserve Bank of India's Monetary Policy Committee to not cut rates sharply this year. The rupee ended the day at 85.71 a dollar, sharply down from 84.8250 a dollar on Wednesday. It fell over 1% against the greenback on Thursday, the most amongst Asian currencies. 

"People had built up positions for rate cuts, so traders were now also looking to exit some of these as uncertainty is also growing," a dealer at another state-owned bank said. The turnover in the gilts market rose to INR 1.27 trillion Thursday from INR 900.00 billion on Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were two trades in the 7.10%, 2034 bond using the wholesale digital rupee pilot worth INR 100 million, the same as Wednesday.

OUTLOOK

On Friday, government bond prices may closely track any developments on the border, dealers said. At a media briefing Thursday evening, Foreign Secretary Misri said India's response to Islamabad's attempt to target military establishments in India was precise and non-escalatory. Any further military action between the two countries may lead to a further fall in prices and the 10-year gilt yield may rise to 6.42-6.43%, dealers said. Traders may also look to sell gilts to avoid exposure to geopolitical risks going into the long weekend, they said. 

Prices will also take cues from the Reserve Bank of India's open market operation auction to purchase gilts and the weekly gilt auction sale, dealers said. The RBI has offered to buy the 6.54%, 2032, the 7.57%, 2033, the 6.19%, 2034, the 6.64%, 2035, and the 7.54%, 2036 gilts at the OMO auction.

Traders are expected to tender gilts closer to the market levels as they have already lightened their books significantly over the last few days, they said. Moreover, investors have already sold over INR 4.00 trillion through OMO auctions in 2025, and banks will not be aggressive in seeking to book profits, they said. The INR-320-billion weekly gilt auction at 1030-1130 IST is expected to sail through, albeit weaker demand for the 6.90%, 2065 bond as the rising border tensions have reduced appetite for long-duration papers.

Gilts may also take cues from the movement in US Treasury yields and crude oil prices overnight. India's GDP growth estimates for Jan-Mar and the annual estimate for 2024-25 (Apr-Mar), due at the end of May, could be the next big trigger for gilts. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.36-6.42% on Friday.

India Gilts: Reverse gains on fears of rising India-Pakistan tensions

MUMBAI--1400 IST--Prices of government bonds reversed gains as traders sold gilts due to fears of a retaliatory attack by Pakistan after India's air strikes early Wednesday, dealers said. Bond prices also tracked the movement of the rupee against the dollar on rising tension between India and Pakistan. Some gains were also erased as state-owned banks continued to book profits after the yield on the 10-year benchmark 6.79%, 2034 gilt fell below 6.32% earlier in the day.

"The market is very volatile right now. Even a small movement is leading to sharp volatility, so it's hard to predict the reason and where the market is heading to," a dealer at a private bank said. "The India-Pakistan conflict is still evolving, so that will continue to create sharp movements."

Gilt prices also fell tracking an intraday fall in the Indian rupee against the dollar, dealers said. The rupee fell sharply below 85 a dollar, as multiple stop-losses were triggered on short dollar bets, dealers in the foreign exchange market said.

State-owned banks trimmed their gilt holdings and preferred to keep their trading portfolios light due to looming uncertainty regarding the India-Pakistan conflict, dealers said. On Wednesday, state-owned banks were the top net sellers as they sold gilts worth INR 63.53 billion in the secondary market, data from Clearing Corp. of India showed.

"We are in wait and watch mode, and I think the best strategy right now will be to exit and book some profits," a dealer at a state-owned bank said. "I know the yield will come down to 6.20-6.25%, and maybe we will not get these levels as the policy draws closer. But if I take an aggressive position now, and then the yield goes to 6.38-40%, that will pinch me more. So I don't want to accumulate as much...mostly churning within a 10- to 15-year segment."

For the rest of the day, traders expect a trading range of 6.32-6.36% on the 10-year yield. Volume in the gilt market was INR 679.70 billion at 1330 IST, higher than INR 489.25 billion same time Wednesday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. (Vidhushi RajPurohit)

India Gilts: Remain higher on FPI buys, hope of easing India-Pakistan tensions

MUMBAI--1137 IST--Prices of government bonds were sharply up, supported by purchases by foreign portfolio investors, dealers said. Market sentiment was mixed, but expectations of an ease in tensions between India and Pakistan led traders to focus on positioning for a terminal repo rate of around 5.50%.

Foreign portfolio investors were likely buying gilts maturing in 4-5 years to stay invested in Indian bonds during a rate-cut cycle, but reduced exposure to longer-duration papers due to geopolitical risk. The 7.04%, 2029 gilt yield was down 3 basis points, while that of the 15-year benchmark 6.92%, 2039 gilt was down less than 1 bp. 

Bonds maturing in more than 10 years were out of favour for most traders because of caution over Pakistan's response to Indian airstrikes in nine regions in Pakistan and Pakistan-operated Kashmir. Some traders, however, see more scope for price appreciation in gilts maturing within 10-15 years. The yield spread of the 15-year benchmark gilt over that of the 10-year benchmark 6.79%, 2034 gilt is currently 12 bps against 10 bps a month ago.  

"Traders will refrain from buying at higher prices now. The press conference showed that India doesn't want war, but there's still a mixed reaction because we don't know how Pakistan will retaliate," a dealer at a state-owned bank said. 

State-owned banks booked profits as the yield on the benchmark 10-year 6.79%, 2034 gilt neared 6.31%, the lower end of the recent trading range, dealers said. Some traders are on the sidelines, avoiding aggressive replacement of gilts in their portfolios even after the Reserve Bank of India purchased gilts topping INR 4 trillion since January. Traders expect a narrow trading range of 6.32-6.35% on the 10-year yield Thursday. Private sector banks likely remained on the buying side after buying gilts worth INR 34.23 billion in the secondary market Wednesday.  

Volume in the gilt market was INR 425.60 billion at 1130 IST, against INR 406.35 billion at the same time Wednesday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform.(Cassandra Carvalho)

India Gilts: Sharply up as fears of escalation in India-Pakistan tensions ease

MUMBAI--1008 IST--Government bond prices rose sharply on Thursday with traders dialling down expectations of further escalation in tensions between India and Pakistan as the situation did not significantly worsen overnight, dealers said. Traders will closely track any developments in military activity between India and Pakistan during the day, they said.  

"It mostly looks like there will not be much escalation in India-Pakistan situation from here, so people who were holding yesterday (Wednesday) are coming to buy now," a dealer at a state-owned bank said. "And except the geopolitical tensions, nothing else is negative in the market, so people will also not want to miss out these levels...looks like there is aggressive buying from a particular segment of the market."

Volume in the gilt market rose sharply after 0930 IST, to INR 361.95 billion at 1030 IST, against INR 312.60 billion at 1030 IST Wednesday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. Dealers said foreign portfolio investors are likely to have bought gilts as fears of escalation in tensions between India and Pakistan eased.

Demand for gilts maturing within seven years was firm as banks bought gilts on increased appetite due to sustained liquidity inflows from the Reserve Bank of India though open market operations auctions. Replacement demand from banks in place of bonds sold to the Reserve Bank of India though OMO auctions also came in. Banks preferred to buy bonds maturing within seven to 15 years, dealers said. Some gains on the 15-year benchmark 6.92%, 2039 bond were capped as traders looked to place short bets ahead of the supply of INR 160 billion of the bond at an auction Friday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.28-6.36%.  (Srijita Bose)

India Gilts:Seen steady; developments on India-Pakistan tension to lend cues

MUMBAI – Government bond prices may open steady Thursday and closely track any developments in military activity between India and Pakistan after India's airstrikes on Pakistan-controlled territory on Wednesday, and continued shelling along the Line of Control. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.31-6.40%. On Tuesday, the 10-year gilt closed at INR 103.17, or 6.34% yield. 

"There is fear of a second round (of retaliations) between India and Pakistan," a dealer at a primary dealership said. "Now, market is just thinking from one auction to the next and there could be some pressure because of that...there is some case building for a 50 bps rate cut in June, though it is not very strong, so some demand should be there."

Any further military action between the two countries might lead to a fall in prices, and the 10-year gilt yield may trend towards 6.40% as traders would be caught wrong-footed, after expecting de-escalation, dealers said. If there is no further escalation in tensions, gilts could move in a narrow range of 6.32-6.35% during the day.

Demand for gilts maturing within five years may rise as traders will look to cut their holdings of longer-duration papers to reduce risks on fear 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 three to 15 years is also seen firm as banks look to replenish stocks of bonds in similar maturities sold to the Reserve Bank of India at open market operations auctions. These bonds may be in favour during the day even if tensions between the two neighbours remain high. Some traders may also prefer long-term bonds due to continued investment demand from life insurers and pension funds, and on expectations that the yield spread on these bonds over the 10-year gilt could narrow further on rate cut hopes.

Some rise in prices on the 15-year benchmark 6.92%, 2039 bond could be capped ahead of supply of INR 160 billion of the bond at an auction Friday. Traders may look to place short bets on the bond during the day. Primary dealers could turn sellers Thursday as they will look to make room ahead of INR 320 billion of gilt supply at an auction Friday.

Meanwhile, dealers said the outlook on inflows from foreign portfolio investors could remain uncertain as the US Federal Open Market Committee kept interest rates unchanged, while warning of rising risks to the US economy from higher inflation and unemployment. While the 10-year US Treasury yield fell slightly to 4.29% at 0835 IST from 4.33% at 1700 IST on Wednesday, the squeeze in interest rate differential on the 10-year benchmark Indian gilt yield over the safe haven asset makes it less attractive for FPIs to buy gilts. Concerns about geopolitical tensions between India and Pakistan could also keep FPIs at bay, dealers said. (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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