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Informist, Thursday, Jul. 3, 2025

By Aaryan Khanna

NEW DELHI – Government bond prices ended on a mixed note. Bonds maturing in 30-50 years fell sharply ahead of the weekly gilt auction Friday, which features INR 160 billion each of the 15- and 40-year bonds. The 10-year benchmark 6.33%, 2035 bond had fallen as traders placed short bets in it ahead of the auction, but recovered losses by the end of trade due to a fall in US Treasury yields, dealers said. Bonds maturing below five years ended slightly higher due to ballooning systemic liquidity.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.30, or 6.29% yield, against INR 100.29, or 6.29%, Wednesday. The most-traded 6.79%, 2034 bond closed at INR 103.09 or 6.34%, against INR 103.07 or 6.34% Wednesday. Trade volumes were down from the previous day as traders awaited US non-farm payroll data for June, scheduled after market hours, for cues on the potential US rate trajectory.

Dealers said long-term bonds had performed well this week due to buys by foreign portfolio investors in bonds maturing in 2037, 2050, and 2053. Moreover, traders had bought these bonds due to lack of long-term bond supply last week at attractive spreads. This led to a sharp correction before the impending supply, as investor demand was not seen robust and cut-off yields are likely to drift higher from current secondary market prices, dealers said.

"The long-end has been supported by FPI buys this week, but they are buying INR 3-odd billion while you have INR 160 billion of supply tomorrow (Friday)," a trader at a private sector bank said. "Liquid paper is also getting shorted before the auction to get a handle on the new bond."

Heading into the auction, traders placed short bets on the 10-year benchmark and 6.92%, 2039 gilts to make room for the fresh stock of a new 15-year, 2040 gilt. The new bond was traded at a yield of 6.65% in the "when-issued" segment of the Negotiated Dealing System – Order Matching platform, 2 basis points higher than the yield on the 2039 gilt. Losses 

The price of the 6.33%, 2035 and 6.92%, 2039 bonds had dipped to the day's low around 1600 IST as traders ramped up their short positions before the market close. However, the bonds recovered losses as the 10-year US Treasury yield fell to 4.25%, the day's low, by 1700 IST. Dealers said the weakness in US yields had been buoying gilt prices through the week, with FPIs also buying domestic bonds in the first half of the day and earlier this week. Likely buying by mutual funds limited losses in liquid and short-term gilts, dealers said.

Moreover, the jobs data was expected to reinforce the case for further rate cuts by the US Federal Open Market Committee, which kept US yields in check despite US President Donald Trump's signature tax-and-spending bill expected to drive up fiscal deficits after it is passed. Traders had begun betting on US rates coming down by 75 bps in 2025. A July or September rate cut by the FOMC is expected to give room to the Reserve Bank of India's Monetary Policy Committee to cut rates in October or December, dealers said.

Bond prices had opened higher as data showed the domestic liquidity surplus surged to a three-year high on Wednesday despite INR 850 billion kept with the RBI at the variable rate reverse repo auction, which reverses Friday. Those gains were quickly eaten into as traders feared another VRRR announcement would come after market hours, with the five-year benchmark 6.75%, 2029 bond first rising and then falling during the day, before ending largely unchanged.

With credit offtake still slow, banks said they would park any excess liquidity in short-term bonds in the near term. Short-term gilts, maturing up to 2028, ended slightly higher, though trade volumes were not robust. On Wednesday, the net liquidity absorbed by the RBI rose to INR 3.75 trillion, the highest level since Jun. 1, 2022.

There were divergent views on how a potential VRRR announcement would impact money market rates, dealers said. Some traders were concerned the weighted average call and triparty repo rate would align closer to the repo rate of 5.50% rather than the Standing Deposit Facility rate of 5.25%, which it has occupied since Tuesday. Others said such concern was overblown as the RBI would limit the size of the auctions to a level which would not push up overnight rates, but prevent them from falling below 5.25%.

"The market does not have a lot of conviction on either side, so it is difficult to actually put a large position on either side," a dealer at a state-owned bank said. "There is still a lot of uncertainty on how the RBI wants to manage liquidity – whether they will announce VRRR today (Thursday), what size it will be – all are questions which prevent any large positioning."

Turnover in the government bond market Wednesday was INR 404.05 billion, lower than INR 446.25 billion Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were two trades worth INR 100 million through the wholesale e-rupee pilot, the same as on Wednesday.

OUTLOOK
On Friday, bond prices may take cues from the overnight movement of US Treasury yields after the release of non-farm payrolls data, which weakened the case for rate cuts in the US. Volatility may be limited ahead of the INR 320 billion auction at 1030-1130 IST, dealers said.

Government data showed the US added 147,000 jobs in June, against 110,000 seen in a Wall Street Journal poll. The unemployment rate fell to 4.1% from 4.2% in May. After the data, US Fed funds futures showed less than 5% chance of a rate cut in the FOMC's July meeting, against around 20% before the data.

On the domestic front, demand for the new 15-year gilt and the 6.90%, 2065 gilt at auction is likely to be muted, and traders said they would demand higher returns to pick up the gilts. Demand from life insurers and pension funds is not expected to be significant and there was a demand-supply mismatch in long-term bonds, likely leading to a rise in the 40-year bond's yield, dealers said.

The RBI's announcement of a seven-day, INR 1 trillion VRRR auction after market hours was expected, dealers said. The size of the auction was slightly lower than some traders had feared. The seven-day auction conducted last week matures on Friday and will add around INR 850 billion to the banking system, on top of the liquidity surplus already at a three-year high. Traders are closely tracking overnight money market rates, which have settled close to the Standing Deposit Facility rate since Tuesday after hovering near the repo rate on Friday and Monday.

A sharp movement in crude oil prices may also lend cues. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.25-6.34% Thursday and that on the most-traded 6.79%, 2034 bond is seen at 6.31-6.39%.

India Gilts: Recover some losses; mutual funds, FPIs likely buyers

MUMBAI--1530 IST--Prices of government bonds recovered partially on purchases by mutual funds and foreign portfolio investors, dealers said. Most bond prices were largely steady in thin trade on caution ahead of the US non-farm payrolls data for June and expectations of a variable rate reverse repo auction announcement by the Reserve Bank of India after market hours, they said.

Some traders, expecting the yield curve to flatten, sold gilts maturing in five years or less in anticipation of a VRRR announcement of around INR 1.50 trillion to INR 2.00 trillion. On Jun. 27, the RBI had held a VRRR auction for INR 1.00 trillion, the reversal of which is due Friday. Traders expect another VRRR auction to be held Friday to roll over the previous auction's amount and drain additional liquidity from the banking system to maintain it at around 1% of banks' net demand and time liabilities, which is about INR 2.31 trillion, as per latest data. The net liquidity absorbed by the RBI Wednesday was INR 3.75 trillion, the highest since Jun. 1, 2022, data from the central bank showed.

Mutual funds bought gilts maturing in up to 10 years, after receiving start-of-the-month inflows, dealers said. Banks and investors preferred gilts maturing in 6-8 years, dealers said. State-owned banks bought these gilts for their held-to-maturity books. Mutual funds also bought these gilts, dealers said. The 6.79%, 2031 gilt offered a yield of 6.20%, higher than that of the five-year 6.75%, 2029 gilt yield of 5.96%. Some traders who expect the yield curve to steepen due to surplus liquidity in the banking system purchased short-term papers. Purchases by FPIs limited the fall in gilt prices. As of 1530 IST, data from Clearing Corp. of India showed purchases worth INR 5.06 billion from FPIs through the fully accessible route.

"Duration is looking good for trading, not for holding," a dealer at a state-owned bank said. "...I think till August we'll have good surplus liquidity, so there is still scope for some steepening in the (yield) curve."

Foreign and domestic banks also picked up the 15-year 6.92%, 2039 gilt as it is seen to be lucrative at the current yield level of 6.65%, dealers said. Primary dealerships placed short bets on the gilt to make room for the new 2040 bond, which will be sold by the government Friday. State-owned banks were buying gilts, but in light volumes, since they saw no reason to fill up portfolios without any case for domestic rate cuts, they said.

The turnover in the gilts market was INR 276.10 billion at 1530 IST, lower than INR 336.90 billion at the same time Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.25-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.31-6.39%.  (Cassandra Carvalho)

India Gilts: Reverse gains on fears of more VRRRs; traders place shorts bets

MUMBAI--1239 IST--Government bond prices reversed early gains on fears that the Reserve Bank of India could announce an additional variable rate reverse repo auction of more than INR 1 trillion later in the day, dealers said. Prices had risen in early trade due to a slight fall in US Treasury yields overnight and a rise in liquidity surplus in the banking system, they said. 

"If the RBI announces a VRRR auction of, say INR 2 trillion, then of course it will impact liquidity and there will be a knee-jerk reaction in bonds as well," a dealer at a private sector bank said. "And shorts before auction tomorrow (Friday)...even NFP (US non-farm payrolls data) is there and it could be higher so I will want to go short right now. If no surprise is there, I can always cover them tomorrow."

The Reserve Bank of India's net liquidity absorbed was at INR 3.75 trillion on Wednesday, the highest since Jun. 1, 2022, data from the central bank showed. The liquidity surplus is significantly above the RBI's target of 1% of banks' net demand and time liabilities, which is currently at INR 2.31 trillion, traders feared that the central bank will announce another VRRR auction this week higher than last week's INR 1-trillion auction. A higher VRRR auction could lead to a fall in prices, at which point traders will look to buy gilts at cheaper prices, dealers said. Most shorter-tenure gilts fell due to fears of VRRR auctions, dealers said. However, traders were of the view that if the RBI decides to roll over last Friday's VRRR auction of the same amount, it will not have much impact on banking system liquidity and overnight rates. 

Traders also placed short bets on the 6.92%, 2039 gilt to make room for INR 160 billion supply of a new 15-year, 2040 gilt at Friday's auction, dealers said. The 15-year gilt was the third-most traded paper in the secondary market. The fall in the 2039 gilt was limited as traders found the yield spread over the 10-year benchmark 6.33%, 2035 gilt attractive, which is currently around 35 basis points, dealers said. 

Meanwhile, foreign portfolio investors were likely buying gilts, which limited the fall in prices, dealers said. This came as the yield differential between the US and India 10-year government bonds is still considerably favourable at over 200 bps and expectations of softer US data to boost rate cut expectations, dealers said. At 1218 IST, Clearing Corp. of India data showed FPIs bought around INR 92 billion worth of gilts through the fully accessible route so far in the week. Meanwhile, some traders also placed short bets before the US non-farm payrolls data, due post market hours Thursday, dealers said. This report may influence expectations for potential rate cuts from the US Federal Open Market Committee.

The turnover in the gilts market was INR 169.00 billion at 1230 IST, higher than INR 144.55 billion at the same time Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.25-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.31-6.39%.  (Srijita Bose)

India Gilts: Up as liquidity surplus most in 3 yrs; US payrolls data in focus

MUMBAI--0938 IST--Government bond prices were up as the liquidity surplus in the banking system rose to the highest in over three years, dealers said. Traders also built positions before the release of US non-farm payrolls data for June, which is due post Indian market hours Thursday, dealers said. 

"The liquidity in the system has risen so that is providing support to the market," a dealer at a private sector bank said. "Plus, NFP is also there so some positioning is there." 

The Reserve Bank of India's net liquidity absorbed was at INR 3.75 trillion on Wednesday, the highest since Jun. 1, 2022, data from RBI showed. Traders are watching for any further announcement of variable rate reverse repo auctions by the Reserve Bank of India, with some sections of the market expecting that the central bank will roll over the auction maturing on Friday. However, traders were of the view that a roll-over of last Friday's VRRR auction will not have much impact on banking system liquidity and overnight rates, which led traders to pick up gilts, dealers said. 

Thursday's key government payrolls report may influence expectations of potential rate cuts from the US Federal Open Market Committee. Traders still expect a quicker pace of rate cuts by the US Fed due to softening economic data, with expectations of at least three rate cuts--one as early as July--in the remainder of 2025. With gilt traders not currently pricing in any more rate cuts by the Reserve Bank of India's Monetary Policy Committee, they likely positioned for change in gilt prices as US rate cut expectations develop in accordance with the data, dealers said. While some traders said they will look to place short bets ahead of the US data, others said they will take a "long position" on the data as they expect a softer data to boost Fed rate cut bets, dealers said. Foreign portfolio investors were likely buying, dealers said. FPIs have bought nearly INR 89 billion worth of gilts through the fully accessible route this week so far, data from Clearing Corp. of India showed.

Trade volume was muted on a lack of fresh domestic rate triggers, dealers said. The turnover in the gilts market was INR 5.10 billion at 0930 IST, significantly lower than INR 24.55 billion at the same time Wednesday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.25-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.31-6.39%.  (Srijita Bose)

India Gilts: Seen steady; traders may place short bets before key US data

MUMBAI – Government bond prices may open steady Thursday due to lack of fresh domestic triggers, dealers said. During the day, traders may build their positions and place some short bets ahead of US non-farm payrolls data for June, due post market hours Thursday, they said.

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.25-6.34% during the day. The gilt ended at INR 100.29 or 6.29% yield on Wednesday. For the most-traded and erstwhile 10-year benchmark 6.79%, 2034 gilt, traders expect a yield range of 6.31-6.39%. The 2034 gilt closed at INR 103.07 or 6.34% yield Wednesday. The yield spread on the 2034 gilt over the 2035 bond inched lower to over 5 basis points on Wednesday, from 8-9 bps last week, and around 6-7 bps around the start of the week. Traders expect the yield spread to further compress to nearly 3-4 bps, dealers said. The 10-year benchmark may continue to underperform compared with the 2034 bond as traders re-adjust their positions to bring the spreads between the bonds lower, dealers said. 

Lack of domestic triggers has led traders to track US data. The benchmark 10-year US Treasury yield fell slightly to 4.26% at 0805 IST from 4.28% at 1700 IST Wednesday after a weak jobs market data. ADP National Employment Report showed private payrolls dropped by 33,000 jobs in June, marking the first drop in over two years, and well below the 95,000 increase estimated by a Reuters poll. 

Traders now await Thursday's key government payrolls report, which will be released a day early due to the Independence Day holiday on Friday. This report may influence expectations for potential rate cuts from the US Federal Open Market Committee. Traders still expect a quicker pace of rate cuts by the US Fed due to softening economic data, with expectations of at least three rate cuts--one as early as July--in the remainder of 2025. Gilts traders will position for change in gilt prices as US rate cut expectations develop in accordance with the data, dealers said. Meanwhile, traders expect foreign portfolio investors to continue buying gilts as yield differential between the US and India 10-year bonds is still considerably favourable at over 200 basis points. FPIs have bought nearly INR 89 billion worth of gilts through the fully accessible route this week so far, data from Clearing Corp. of India showed.

On the domestic front, traders will watch for any further announcement of variable rate reverse repo auctions by the Reserve Bank of India, with some sections of the market expecting that the central bank will roll over the auction maturing on Friday. Traders are closely tracking overnight money market rates, which has been settling close to the Standing Deposit Facility rate since Tuesday after hovering near the repo rate on Friday and Monday. State-owned banks may purchase gilts for their held-to-maturity books as the Jul-Sept quarter has begun, dealers said.  (Srijita Bose)

End

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

Edited by Akul Nishant Akhoury

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