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Informist, Tuesday, May 20, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended sharply higher on purchases from state-owned and private sector banks at levels seen as lucrative. The purchases were on expectations of a record surplus transfer by the Reserve Bank of India to the central government and bets of further rate cuts, dealers said.

"There was just some value buying from privates (private sector) and PSU (state-owned) banks when prices fell to INR 103.60 (on the benchmark 10-year 6.79%, 2034 gilt) around 2:30-3:30 pm (1430-1530 IST)," a trader at a primary dealership said. "Stop losses would've been hit on shorts (short bets) at INR 103.6250, which led to aggressive short covering." 

The benchmark 10-year 6.79%, 2034 gilt closed at INR 103.67 or 6.27% yield, from INR 103.49 or 6.29% yield Monday. The on-the-run 10-year 6.33%, 2035 bond closed at INR 100.78 or 6.22% yield, from INR 100.67 or 6.24% on Monday.

Short-term gilts, which are more sensitive to changes in interest rates, were up more than most tenures as traders preferred gilts maturing in up to seven years on bets of further rate cuts by the RBI's Monetary Policy Committee. The 5-year benchmark 6.75%, 2029 gilt ended at 5.90%, 10 basis points below the RBI's repo rate of 6.00% and the lowest closing level since Feb 21, 2022. The sharp rise in prices of the gilt is despite the INR-150-billion fresh supply of the 2029 gilt that will come at the weekly gilt auction Friday. 

Private sector and state-owned banks preferred short-term gilts, both for their trading books and to refill their 'held-to-maturity' books after a slew of gilt purchases by the RBI at its open market operation auctions since January. Some foreign portfolio investors also purchased gilts maturing in four to five years, dealers said. 

The central bank has bought gilts worth around INR 4.84 trillion through open market operations auctions since January. Some dealers expect the central bank to announce another series of OMO auctions either this week or next week, though most traders expect the RBI to pause them until the Monetary Policy Committee's meeting in June or till the central bank gauges the liquidity impact of the RBI surplus transfer to the government. In the interim, the central bank may announce a dollar/rupee buy/sell swap instead, dealers said. 

In a meeting last week, some members of the Fixed Income Money Market and Derivatives Association of India suggested that the association should not seek further bond purchases under open market operations due to comfortable liquidity. The central bank bought gilts worth INR 192.03 billion at the last scheduled auction for May Monday.

"I think this Friday or next week we'll get another OMO calendar for around INR 1 trillion," a dealer at a state-owned bank said. "At yesterday's (Monday's) auction, the cut-off prices were good because the RBI got some comfort from the switch auction. Same papers, such as the 6.19%, 2034 gilt, it had bought in OMO (auctions earlier) and sold in switch."

With replacement demand largely centred in short-term gilts, bonds maturing in more than 15 years were largely out of favour, dealers said. Prices of long-term gilts were mostly down, as traders sold these papers to purchase short-term bonds. Some demand from insurance companies to match their liabilities was likely, dealers said. Demand for Separate Trading of Registered Interest and Principal Securities was also seen from banks.

Domestic traders are unlikely to aggressively sell gilts at current market prices, they said. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data at 1800 IST showed trades worth INR 88.37 billion in the 6.79%, 2034 gilt, down from around INR 100.00 billion at the beginning of the month.

Foreign banks have continuously been selling gilts. Data from Clearing Corp. of India shows foreign banks have net sold gilt worth INR 337.76 billion in the secondary market so far this month till Monday. Foreign portfolio investors have been churning portfolios, dealers said. FPIs bought gilts maturing within five years as the interest rate differential between US yields and Indian government bonds widened, dealers said.

However, FPIs simultaneously also chose to sell their longer-duration bond holdings to limit their exposure to Indian gilts. Prices of government bonds opened higher Tuesday on account of an overnight fall in US Treasury yields, dealers said. The yield on the 10-year benchmark US Treasury note fell by 10 basis points from the close of the Indian market hours Monday to 4.46% at 1700 IST. The spread between the 10-year benchmark 6.79%, 2034 gilt and the 10-year US note widened to 181 bps from 173 bps at close Monday.

The turnover in the gilts market on Tuesday was at INR 581.50 billion, slightly higher than INR 545.90 billion Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades using the wholesale digital rupee pilot on Tuesday, whereas two trades in the 6.33%, 2035 bond worth INR 100 million were conducted through this method Monday.

OUTLOOK

On Wednesday, gilt prices may take cues from the movement in the US Treasury yields after comments from US Federal Reserve officials, dealers said. 

Strong demand is seen at the Treasury bill auction of INR 190 billion Wednesday. Mutual funds and large private sector banks are likely to bid aggressively, along with possible bids from foreign investors, due to their preference for short-term securities, dealers said.  

In the secondary market, demand for gilts maturing in up to 5 years is likely to continue as traders prefer the shorter end of the yield curve on the expectation of further rate cuts, along with demand to replenish banks' 'held-to-maturity' books.

Traders await the RBI's payment of its surplus transfer to the central government, which will add durable liquidity to the banking system. Traders also await the outcome of the central bank's meeting with bank executives Wednesday. The meeting to discuss changes to the central bank's liquidity management framework, treasury officials told Informist. 

India's GDP growth estimates for Jan-Mar and for 2024-25 (Apr-Mar), due on May 30, could be the next big trigger for gilts. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.24-6.30% on Wednesday.

India Gilts: Remain up on hope of bumper RBI surplus transfer

MUMBAI--1533 IST--Prices of government bonds were sharply up on purchases by state-owned banks and likely by private sector banks, dealers said. Traders anticipate a record-high transfer of surplus, of around INR 3 trillion, to the central government from the Reserve Bank of India. The quantum of the surplus will likely be announced on Friday.

Traders picked up short-term bonds maturing in up to seven years on expectation of a 'bull-steepening' of the gilt yield curve, wherein the fall in short-term rates is greater than that of the long-term gilts. Investors such as banks' asset and liability managers also preferred the shorter end of the curve to replenish their 'held-to-maturity' books, as gilts of 10-years and above looked less appealing amid a rate-cut cycle.

"I think investors have already positioned (for rate cuts), so this is more of traders expecting a high dividend number," a dealer at a private sector bank said. "Short-term papers are going into ALM (asset and liability management books) because no one is expecting a huge rally in long-term now." The 6.75%, 2029 gilt yield was down around 4 basis points from Monday's close, at 5.90%.

The RBI has bought gilts worth around INR 4.84 trillion through open market operation auctions since January. The central bank bought gilts worth INR 192.03 billion at the last scheduled OMO auction for May Monday. Traders expect the RBI to pause its slew of OMO auctions at least until the surplus transfer is announced, or until the MPC's meeting in June. In the interim, the central bank may announce a dollar/rupee buy/sell swap instead, dealers said. 

Traders expect the benchmark 10-year 6.79%, 2034 gilt yield to fall to 6.20-6.25% before the meeting of the RBI's Monetary Policy Committee in June, they said. At these key levels, state-owned banks are likely to book profit. However, the trajectory of bond prices would depend on the RBI's transfer of surplus to the government, dealers said. 

Traders also bought gilts with the view that India's GDP growth for Jan-Mar would be between 6.2% and 6.5%. The figure is in contrast with some economists' estimate of 6.8%. However, the priority for gilt traders was currently the surplus transfer, and positioning for GDP was not aggressive, they said. Bond prices were also buoyed by a fall in overnight indexed swap rates, dealers said. The 5-year swap rate fell by four basis points to 5.67% from Monday's close. 

Volume in the gilt market was INR 449.45 billion at 1530 IST, higher than INR 358.75 billion Monday around the same time, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the rest of the day, the yield on the 10-year benchmark 6.79%, 2034 gilt is seen within 6.25-6.32%.  (Cassandra Carvalho)

India Gilts: Remain up as US yields fall; shorter-tenure bonds surge more

MUMBAI--1224 IST--Government bond prices remained firm as US Treasury yields fell overnight, dealers said. Gilt prices were sharply up earlier, but the gains were capped as traders sold bonds at a profit. Shorter-tenure bonds rose the most due to strong expectations of two more policy rate cuts of 25 basis points each by the Reserve Bank of India's Monetary Policy Committee in 2025, dealers said.

"Market sentiment is positive right now, with rate cut expectations and RBI dividend also seen on the higher side," a dealer at a primary dealership said. "And UST (US Treasury yields) fell below the 4.50% mark, so that is also giving some comfort to the market...short term is seeing more rally because we are moving closer to policy." 

The yield on the 10-year benchmark US note fell to 4.45% at 1100 IST Tuesday from 4.56% at 1700 IST Monday. The fall was due to attractive yield levels for institutional investors, even as traders fear that the yield could rise back above 4.50%, with some fearing the yield will touch 4.80% levels because of the uncertain economic outlook and ballooning debt in the world's largest economy, dealers said. 

Foreign portfolio investors likely bought gilts maturing within five years as the interest rate differential between US yields and Indian government bonds widened, dealers said. However, FPIs simultaneously also chose to sell their longer-duration bond holdings to limit their exposure to Indian gilts. 

State-owned and private-sector banks bought gilts in place of bonds sold to the RBI through its open market operation auctions, dealers said. The last OMO auction scheduled for May was held on Monday, which took the RBI's total buys through auctions since January up to nearly INR 4.84 trillion. Banks' replacement demand remained focussed on bonds maturing within five to 15 years, with demand seen for similar maturity papers at the state bond auction Tuesday as well, dealers said. 

Shorter-tenure gilts maturing within eight years surged the most on aggressive buys likely from mutual funds, dealers said. Demand for Separate Trading of Registered Interest and Principal Securities was also seen from banks in gilts maturing in three to seven years. Traders also picked up shorter-tenure bonds on expectations of a further steepening in the yield curve on rate cut expectations, dealers said. The yield spread on the 10-year benchmark 6.79%, 2034 bond over the five-year benchmark 6.75%, 2029 bond has widened to over 35 bps from nearly 27 bps at the end of April. 

Volume in the gilt market was INR 208.75 billion at 1220 IST, higher than INR 158.80 billion Monday around the same time, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.79%, 2034 gilt is seen within 6.25-6.32%.  (Srijita Bose)

India Gilts: Sharply up on fall in US yields, replacement buy post OMO auctions 

MUMBAI--0930 IST--Prices of government bonds opened higher Tuesday on account of an overnight fall in US Treasury yields, dealers said. Demand was also firm as traders sought to replace the bonds sold to the Reserve Bank of India under its open market operation auctions, they said.

"Yesterday (Monday), there were talks that the US yield might go up to 4.80% level and that led to selling of gilts, but now that has cooled down so the market is also up," a dealer at a private sector bank said.

The yield on the 10-year benchmark US Treasury note fell by 10 basis points from close of the Indian market Monday to 4.46% at 0920 IST. As a result, the spread between the 10-year benchmark 6.79%, 2034 gilt and the 10-year US note widened to 180 bps from 173 bps at close Monday.

"Banks have sold more than INR 4 trillion worth of gilts to RBI at OMO auctions and they have not yet replaced the quantum," a dealer at another private bank said. "There will be demand for that also as the levels are good to buy."

Traders are of the view that state-owned banks will be on the buying side as they have been the major sellers at the RBI's OMO auctions. On Monday, public sector banks were the top net buyers as they bought INR 82.44 billion worth of gilts, data from Clearing Corp. of India showed. The central bank bought INR 192.30 billion worth of gilts at the last scheduled auction for May on Monday. Since January, the RBI has bought gilts amounting to INR 4.84 trillion through OMO auctions.

Traders also await the result of the INR 148-billion state bond auction Tuesday. The amount is lower than the indicative calendar for Apr-Jun, which showed 18 states were scheduled to borrow INR 265 billion Tuesday. Volume in the gilt market was INR 99.15 billion at 0930 IST, higher than INR 43.55 billion at 0930 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.79%, 2034 gilt is seen within 6.26-6.32%. (Vidhushi RajPurohit)

India Gilts: Seen up on fall in US yields; state bond auction result eyed 

MUMBAI – Government bond prices will likely open slightly higher tracking an overnight fall in US Treasury yields, dealers said. Traders will look at the result of the state bond auction Tuesday for direction later in the day, they said. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.26-6.32%. On Monday, the 10-year gilt ended at INR 103.49, or 6.29% yield. The yield on the 10-year benchmark US Treasury note climbed down by 11 basis points to 4.45% at 0800 IST. Consequently, traders were of the view that gilt prices will likely rise as the spread between the two benchmarks widens. 

"Market might open 10 paise up because of the fall in US yields, but it will remain mostly range bound as there is no incremental cue," a dealer at a private bank said. "It's mostly the foreign banks that are now reacting to US yields."   

Prices were weighed down as the yield on the 10-year US Treaury note rose to 4.56% at Indian market close Monday, narrowing the interest rate spread between the two countries' benchmarks by 12 bps from Friday's close to 173 bps. The narrowing of interest rate spread spurred selling from foreign banks as they sold INR 71.66 billion worth of gilts Monday, data from Clearing Corp. of India showed. 

Traders will also look at the result of the INR 148-billion state bond auction Tuesday. The amount is lower than the indicative calendar for Apr-Jun, which showed 18 states were scheduled to borrow INR 265 billion Tuesday. The lower-than-indicated size for auction is also seen as a positive for the gilts market, dealers said.

Replacement demand for bonds maturing between seven and 15 years is also seen strong as banks will look to replenish stock of papers with similar maturities sold to the RBI under its open market operations auctions, they said. Since January, the RBI has brought gilts amounting to INR 4.84 trillion through OMO auction. On Monday, the central bank bought INR 192.30 billion worth of gilts at the last scheduled auction in May. (Vidhushi RajPurohit)

End

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

Edited by Saji George Titus

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