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Informist, Friday, Jul. 4, 2025

By Aaryan Khanna

NEW DELHI – Prices of government bonds ended on a mixed note Friday. The 10-year benchmark gilt ended lower due to an overnight rise in US Treasury yields as hopes of a rate cut in the world's largest economy were pushed back, dealers said. Slightly better-than-expected demand at the weekly gilts auction helped long-term bonds to recover losses and end slightly higher.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.25, or 6.29% yield, against INR 100.30, or 6.29%, Thursday. The most-traded 6.79%, 2034 bond closed at INR 103.01, or 6.35%, against INR 103.09, or 6.34%, Thursday.

Cut-off prices at the INR 320.00 billion weekly gilts auction were largely on expected lines. However, the bid-cover ratio at the auction, at three times the notified amount, was better than traders had expected and reflected firm demand, dealers said. State-owned banks bid for a large quantum of the new 2040 bond to add to their available-for-sale portfolios, they said. Issued at par at a coupon of 6.68%, the 2040 bond ended at INR 100.35. Some banks missed out on the new bond and aggressively bought it in the secondary market. This led to a spurt in short-covering in the 15-year benchmark 6.92%, 2039 bond, and helped it to recover all losses by the end of the day.

Traders had expected insurers would demand higher yields to pick the 40-year benchmark gilt at the debt sale. With the cut-off price slightly better than the median estimate in an Informist poll, traders were caught on the wrong foot as they had expected long-term bond prices to continue to fall, dealers said. Some foreign banks likely bid for the 6.90%, 2065 gilt on the view that its spread over the 10-year benchmark, at around 80 basis points, was lucrative.

Demand due to bond forwards, forward-rate agreements, and Separate Trading of Registered Interest and Principal of Securities also helped to absorb the INR 160.00 billion supply, dealers said. Trade volumes in the bonds maturing in 30-50 years picked up after the auction result and were higher than usual, with all the long-term benchmark bonds ending higher in price terms.

"I would call it a positive day," said a dealer at a primary dealership. "The auction was actually quite strong for the bonds that we had on offer, both investors and even trading hands bid in size. There is also not much risk of holding a position over the weekend this time. In fact, people are talking about a positive in terms of the trade deal."

Over the weekend, bond dealers look forward to news of a preliminary trade deal between India and the US ahead of the Wednesday deadline set by President Donald Trump for imposing reciprocal tariffs on the trading partners of the US. There was no immediate assessment of how such a deal would affect bond prices, dealers said. While a deal is likely to push up India's GDP growth potential, a negative for gilts, lower imported inflation and improved sentiment from foreign portfolio investors may be positives, they said.

Bond prices had fallen in early trade owing to the overnight rise in US yields and fears of poor demand at the auction. The yield on the 10-year benchmark US Treasury note rose to 4.35% at close Thursday from 4.26% at 1700 IST after the release of US non-farm payrolls data, which showed the US added 147,000 jobs in June, against 110,000 forecast in a poll by The Wall Street Journal. The unemployment rate fell to 4.1% in June from 4.2% in May. Weekly unemployment claims were also lower than expected. After the data, US Fed funds futures showed less than 5.2% chance of a rate cut at the US Federal Open Market Committee's July meeting, against around 24% before the data.

US markets are shut Friday for Independence Day. However, some traders took cues from Treasury futures, which indicated the US 10-year yield was close to 4.31%, to buy gilts. The buying was led by traders in private-sector and foreign banks, dealers said. State-owned banks also picked up the 10-year benchmark gilt as its yield tipped over the psychologically crucial 6.30% mark during the day, helping it to end off lows.

"Most of the reaction got over in the first half alone, because US yields had moved in the night," a dealer at a state-owned bank said. "We saw some good levels to buy today (Friday), both the benchmark (10-year gilt) and the 15-year bonds."

Short-term bonds were well-bid through the day and losses were limited as the quantum of the variable rate reverse repo operation Friday was slightly less than feared. In an announcement Thursday, the RBI said it would conduct a seven-day, INR 1.00-trillion VRRR auction for the second straight week. Some traders had feared an auction as large as INR 1.50 trillion, as a proxy for banking system liquidity rose to INR 4.04 trillion Thursday, its highest since May 2022.

Some traders were also relieved the RBI did not announce a second VRRR auction for Friday, after its INR 1.00-trillion auction at 1000-1030 IST was subscribed 1.7 times. This was seen as an indication that the central bank would not be aggressive in draining liquidity and bringing it down to 1% of banks' net demand and time liabilities at all times, dealers said. Moreover, it alleviated concern that overnight money market rates may rise from near the standing deposit facility rate of 5.25% currently to around the repo rate of 5.50%. Most bonds maturing before 2029 ended slightly higher.

"The VRRR auctions would aim to ensure the weighted average call rate is between repo and SDF (standing deposit facility rate) and TREPS (tri-party repo rate) doesn't fall below SDF," IDFC FIRST Bank Chief Economist Gaura Sen Gupta wrote in a report Friday. "The quantum of VRRRs is expected to rise over the next few months as system liquidity rises."

Turnover in the government bond market Wednesday was INR 417.85 billion, similar to INR 404.05 billion Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform.

OUTLOOK
Gilts are not traded Saturday. Monday, bond prices may open steady in a data-light week for both the India and the US. The movement in US yields after an extended weekend may lend cues, especially ahead of the release of the US FOMC minutes for its June meeting Wednesday, dealers said.

The RBI's further actions on liquidity are being keenly watched by traders after the central bank announced a lower-than-expected VRRR auction Friday at INR 1.00 trillion. Any short-term liquidity absorptions through VRRRs could be announced for Tuesday or later, when the central bank assesses banking system liquidity after scheduled outflows for excise duty.

The auction results Friday showed demand-supply conditions were broadly in check, and the yield curve is unlikely to materially steepen or flatten from here on, dealers said. Some long-term bonds may rise early next week as insurers take delivery of their zero-coupon securities from the auction. A lack of RBI liquidity absorption measures may also keep short-term bonds in favour due to the significant liquidity surplus, dealers said.

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 6.26-6.33% Monday and that on the most-traded 6.79%, 2034 bond is seen at 6.32-6.38%.

India Gilts: Remain down; little changed after auction along expected lines

MUMBAI--1440 IST--Prices of government bonds remained down, and were little changed after the result of the INR 320-billion gilt auction was along expected lines, dealers said. 

The Reserve Bank of India set a coupon of 6.68% on the new 2040 gilt, same as estimated in an Informist poll. The cut-off on the 6.90%, 2065 gilt was INR 97.27, slightly higher than a poll estimate of INR 97.21. 

Traders who had placed short bets on the 6.92%, 2039 gilt covered them at the auction of the 2040 gilt, dealers 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. At 1400 IST, the data showed trades worth INR 44.48 billion in the 6.92%, 2039 gilt, up from INR 37.87 billion Thursday. Foreign banks, state-owned banks and primary dealerships likely bid for the bond for their trading books, dealers said. Pension funds likely bought the long-term bond, dealers said. Some of the auction stock was bought for Separate Trading of Registered Interest and Principal of Securities, dealers said.

In the secondary market, the auction result did little to boost sentiment, which was weighed down by a rise in US yields and strong economic data in the US which weakened the case for a quicker rate-cut cycle in the US.

"Had the coupon come at 6.67%, maybe sentiment would've improved," a dealer at a state-owned bank said. "If there's no aggression in cut-offs then traders also won't be aggressive (prices won't recover) after the cut-offs. People were waiting that if market rises by 5-6 paise after cut-off, they will sell at that momentum but it didnt happen that way." 

Traders expect prices to fall further nearing the end of trade as they may lighten their portfolios to trim risk ahead of the weekend, dealers said. 

The turnover in the gilts market was INR 218.25 billion at 1430 IST, slightly lower than INR 236.25 billion at the same time Thursday, 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: Most dn; small VRRR auction size limits fall in short-term gilts

MUMBAI--1209 IST--Most government bond prices remained down compared to the previous day due to a rise in US Treasury yields and short bets before results of Friday's bond auction, dealers said. However, most shorter tenure gilts outperformed, with lower-than-expected size of variable rate reverse repo auction Friday limiting the fall in these gilts, they said. 

"This week due to more supply of long term bonds and US data, pressure is there in long bonds which will reflect at auction also," a dealer at a primary dealership said. "Though yield spreads are good and at 7.11% (cut-off yield expected for 6.90%, 2065 bond at auction), PFs (pensions funds) will come for a good book yield."

At the auction, demand for both the bonds are seen mixed. State-owned banks were likely the major bidders for the new 15-year bonds to add to both their held-to-maturity and trading books, dealers said. However, other traders demanded a higher yield than current market prices for the bond, which could lead to a higher coupon on the new 2040 bond, they said. An Informist poll estimated the Reserve Bank of India to set the coupon on the new 2040 bond at 6.68%, over 2 basis points higher than current yield on the 15-year benchmark 6.92%, 2039 bond. 

Meanwhile, for the 6.90%, 2065 bond, dealers said investors demanded higher yield returns. Due to a mismatch in demand and supply in longer tenure bonds, cut-off price on the 2065 gilt is expected to be lower than market price, dealers said. Longer tenure bonds have underperformed as traders moved towards shorter tenure gilts with uncertainty on rate cuts expected to further widen yield spreads on these bonds over the 10-year benchmark gilt, dealers said. Sales by foreign portfolio investors were also likely in longer tenure gilts in the secondary market after a strong jobs data in the US weakened the case for rate cuts by the Federal Open Market Committee, they said. 

Traders were also cautious about more variable rate reverse repo auctions next week as 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. The RBI's net liquidity absorbed was at INR 4.04 trillion as of Thursday, the highest since May 19, 2022, data from the central bank showed. However, most said that even with another VRRR auction, impact on liquidity and overnight rates will not be substantial. Shorter tenure gilts performed better than other tenures. However, fears of more VRRR auctions kept prices in shorter tenure gilts from rising, dealers said. Traders are keenly watching out for a trade agreement between India and the US over the weekend as the Jul. 9 deadline for US President Donald Trump's tariffs neared, which is expected to keep prices down throughout the day, dealers said.

The turnover in the gilts market was INR 117.40 billion at 1130 IST, higher than INR 130.50 billion at the same time Thursday, 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: Down on rise in US yields, short bets before auction

MUMBAI--0934 IST--Government bond prices were down Friday tracking the overnight rise in US Treasury yields, dealers said. Traders also awaited the auction of gilts worth INR 320 billion, and likely placed short bets before the auction, they said. 

"US yields is the major factor for market fall," a dealer at a private sector bank said. "Some shorting before auction could also be there, but these are also good levels to buy."

The yield on the 10-year benchmark US Treasury note rose to 4.35% from 4.26% at 1700 IST after the release of US non-farm payrolls data, which weakened the case for rate cuts in the US. US Fed funds futures at 0921 IST showed only 5.2% chance of a rate cut in the US Federal Open Market Committee's July meeting, against around 24% before the data. Foreign banks were likely sellers in early trade, dealers said, after buying around INR 22 billion worth of bonds Thursday, before the US data, according to data from Clearing Corp. of India. However, state-owned banks were likely buying gilts, which limited losses, dealers said. 

At the auction, demand for the new 2040 bond is expected to be mixed. While some investors will look to pick up the new bond, traders said they would demand higher returns to pick up the gilts. Traders also likely placed short bets on the current 15-year 6.92%, 2039 gilt to make room for the new 2040 bond at auction, dealers said. Some said demand for the 6.90%, 2065 gilt is expected to be firm from long-term investors due to attractive yield differential over the 10-year benchmark. However others said demand from life insurers and pension funds may not be significant and there is a demand-supply mismatch in long-term bonds, which could lead to poor cut-offs at the auction, dealers said.

Traders are also keenly watching overnight rates as the Reserve Bank of India conducts second variable rate reverse repo auction of INR 1 trillion so far this year. With net liquidity absorbed by the RBI at INR 4.04 trillion as of Thursday, the highest since May 19, 2022, the impact of the VRRR auction on overnight rates is seen negligible, dealers said. The fall in shorte-tenure bonds was limited due to a lower-than-expected quantum of VRRR auction Friday, they said. 

The turnover in the gilts market was INR 34.20 billion at 0930 IST, significantly higher than INR 5.10 billion at the same time Thursday, 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 down on rise in US yields; short bets likely before auction

MUMBAI – Government bond prices are seen lower Friday due to overnight rise in US Treasury yields, dealers said. Traders may also place short bets before the INR 320-billion auction and take cues from its results, they said.

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.25-6.35% during the day. On Thursday, the bond ended at INR 100.30 or 6.29% yield. 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 103.09 or 6.34% yield Thursday.

The yield on the 10-year benchmark US Treasury note rose to 4.35% from 4.26% at 1700 IST after the release of US non-farm payrolls data, which weakened the case for rate cuts in the US. Government data showed the US added 147,000 jobs in June, against 110,000 forecast in a Wall Street Journal poll. The unemployment rate fell to 4.1% in June from 4.2% in May. After the data, US Fed funds futures showed less than 5.2% chance of a rate cut in the US Federal Open Market Committee's July meeting, against around 24% before the data.

Demand for the new 15-year gilt and the 6.90%, 2065 gilt at the auction is likely to be muted, and traders said they would demand higher returns to pick up the gilts. However, traders may place short bets on the current 15-year, 6.92%, 2039 bond to make room for the new bond at the auction, dealers said. Though demand from life insurers and pension funds is not expected to be significant and there is a demand-supply mismatch in long-term bonds, if a large life insurer shows interest at the auction, cut-offs for the 2065 bond could be aggressive, they said. 

After market hours, the Reserve Bank of India Thursday said it will Friday hold a seven-day variable rate reverse repo auction of INR 1 trillion, the same as last week. The size of the auction is 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. (Srijita Bose)

End

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

Edited by Rajeev Pai

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