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By Srijita Bose

MUMBAI – Government bond prices ended sharply higher Wednesday on optimism around a rate cut by the Federal Open Market Committee later in the day, with short-term bonds outperforming other tenures, dealers said. Traders covered short bets placed earlier on expectations that the FOMC will cut the interest rate by a cumulative 75 basis points during the year, they said.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 98.98, or a yield of 6.47%, against INR 98.84, or 6.49%, Tuesday. Some expect the Reserve Bank of India's Monetary Policy Committee to also take cues from the US Fed and cut the repo rate further during the year, which aided prices, dealers said.

Traders covered short bets on hope that the FOMC would cut the interest rate by at least 25 basis points Wednesday, with some off-chances of a 50 bps cut. Traders are waiting for the Fed's 'dot-plot' to gauge future rate cuts, with expectations of a 75 bps cut cumulatively during the year, and some betting on another 75 bps cut in 2026. However, others said that with inflation in the US expected to inch up, rate cuts by the FOMC may be limited, and refrained from buying aggressively. 

"The near-term view of Fed is expected to be dovish, which is why there is good traction in gilts today, especially in the short-end (of the curve)," a dealer at a primary dealership said. "OIS (overnight indexed swap rates) are also on the receiving end, and its mostly foreign banks and private (sector) banks who are there in both short-term bonds and swaps."

Shorter-tenure bonds rose on bets of rate cuts by the FOMC, and then the MPC in either October or December, dealers said. Bonds maturing in up to five years outperformed other tenures, with the 6.01%, 2030 bond ending at INR 99.30, or 6.18% yield, 5 bps lower than the previous close. Banks switched between gilts, with some selling from their held-to-maturity books and adding them in their trading books on expectations to a further rise in prices due to rate-cut bets, in order to maximise profits ahead of the quarter ending Sept. 30. Traders in bonds generally considered illiquid, also rose as banks, especially state-owned banks picked up these bonds for their investment books, dealers said.

An overnight fall in US Treasury yields and a sharp rise in the rupee also aided the rise in gilts, dealers said. The yield on the 10-year US Treasury note fell 4.00% during the day from 4.05% at 1700 IST Tuesday. The rupee closed at 87.82 against the dollar, rising from its previous close of 88.05 ahead of the FOMC outcome at 2330 IST. 

Traders covered short bets on the 10-year gilt on expectations of prices to rise further after the much expected rate cut by the FOMC Wednesday, dealers said. In the special repo segment of the Clearcorp Repo Order Matching System, the volume of the 2034 gilt was INR 190.96 billion as at 1903 IST, lower than INR 193.62 billion Tuesday. The number of trades in a paper in the special repo segment of the Clearcorp Repo Order Matching System is a proxy of the short sales in that bond. However, traders refrained from aggressively covering short bets ahead of the INR 300 billion fresh supply of the 2035 bond at auction Friday, where they expect a cheaper cover on the bond, dealers said. Though Friday's auction is expected to be the last fresh supply of the 2035 bond, traders expect the bond to continue to trade as the benchmark 10-year paper for another two months, they said. 

"All eyes are on FOMC's decision now and the dot-plot," a dealer at a state-owned bank said. "Some people have been betting on RBI rate cut also. But there is also auction, so that kept prices from rising further."

The 15-year benchmark 6.68%, 2040 bond was the second-most traded bond on the RBI's Negotiated Dealing System-Order Matching platform, with banks picking up the gilt at yields seen attractive on expectations of rate cuts, dealers said. Longer-tenure bonds also rose Wednesday as traders picked up the bonds on rate cut bets and on lower supply of these bonds in the second half of the financial year, they said. Traders widely expect the RBI to lower the share of longer-tenure bonds in the gilt borrowing calendar for Oct-Mar. 

Turnover in the government bond market was at INR 467.25 billion, higher than INR 326.85 billion Tuesday, according to data on the RBI's NDS-OM platform. There were no trades using the wholesale digital rupee pilot for the third consecutive day. 

OUTLOOK

On Thursday, bond prices may take cues from the overnight movement in US yields, dealers said. Traders are waiting for the US FOMC decision later in the day to bet on further rate cuts in the US and the MPC later in the year, they said.  

The US rate-setting panel is widely expected to cut its policy rate by 25 basis points, with the CME FedWatch tool showing a 94% chance of a 25 bps cut and nearly 6% chance of a 50 bps rate cut priced in Fed funds futures. Traders will await the committee's commentary and any projection of future rate cuts during the rest of the year. 

If the FOMC decides to keep rates unchanged or sees fewer cuts during the rest of the year, then gilts may fall during the day, with some expecting the yield on the 10-year gilt to rise near 6.55% in case of "hawkish" commentary by the panel. Traders remain uncertain about further rate cuts in India but may ramp up their bets if they see a consistent US rate cut cycle, which could open up room for the MPC to also cut rates in October or December. By the end of September, some dealers expect the 10-year benchmark gilt yield to fall below 6.40% if the FOMC opens up further opportunity of rate cuts.

Some traders, especially those from primary dealerships, are also likely to place fresh short bets ahead of the gilt auction Friday, dealers said. The government will sell INR 300 billion of the 10-year 2035 bond on Friday. 

Traders may also take cues from geopolitical developments, especially on US tariffs on Indian goods. Recent positive comments on a trade deal and a thaw signalled by the leaders of the two countries. Bond traders may also track the movement of crude oil prices and the rupee against the dollar. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.40-6.55%. 

India Gilts: Near day's high on optimism ahead of US FOMC rate decision

MUMBAI--1615 IST— Government bond prices remained up as foreign banks and private-sector banks continued to buy gilts ahead of the US Federal Open Market Committee meeting outcome at 2330 IST, dealers said. However, state-owned banks likely sold bonds at a profit, limiting a further rise in prices, they said.

The yield on the 10-year benchmark 6.33%, 2035 bond remained below the 6.48% yield level. However, some said the 10-year gilt yield could settle near 6.46% at close due to some traders covering their short bets ahead of the Fed decision, dealers said. Traders covered short bets on hopes that the FOMC will cut the interest rate by at least 25 basis points Wednesday, with some off-chances of a 50 bps cut. Traders are waiting for the Fed's 'dot-plot' to gauge future rate cuts, with expectations of a 75 bps cut cumulatively during the year, and some betting on another 75 bps cut in 2026.

Foreign portfolio investors likely picked up gilts after a fall in US Treasury yields and in anticipation of policy easing by the FOMC. However, data from Clearing Corp. of India showed sales worth INR 6.76 billion by FPIs through the fully accessible route so far on Wednesday.

Shorter-tenure bonds rose on bets of rate cuts by the Fed. Some expect the Reserve Bank of India's Monetary Policy Committee to also take cues from the US Fed and cut the repo rate further during the year, dealers said. However, due to the overall uncertainty around domestic rate cuts, traders refrained from placing large and aggressive bets. The 6.01%, 2030 bond rose by 18 paise to INR 99.25.

"There is good traction in short bonds and overall, the market is also supported," a dealer at a primary dealership said. "But there's an auction on Friday, so 10-year is relatively seeing limited buys and PSUs (state-owned banks) are also profit booking at every level."

The turnover in the gilts market was INR 349.85 billion at 1615 IST, compared to INR 299.20 billion at 1630 IST Tuesday, 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 6.45-6.52%. (Muskan Lodhi)

India Gilts: Remain up on optimism before US FOMC rate decision

MUMBAI--1350 IST--Government bond prices remained up on likely buying by foreign and private-sector banks ahead of the US Federal Open Market Committee meeting outcome at 2330 IST, dealers said. Gains were capped due to profit booking on the view the 10-year gilt yield would not fall below the psychologically crucial 6.48% mark without a domestic trigger.

A section of the market was optimistic the FOMC outcome would be positive for gilt prices, with some betting on a "jumbo" 50-basis-point rate cut. These traders see the yield on the benchmark 6.33%, 2035 gilt falling as low as 6.43% on Thursday if the FOMC goes ahead with an outsize rate cut, or US Treasury yields fall sharply on the view the US rate-setting panel will cut policy rates more than the 75-bps already priced in for 2025.

Moreover, a 50-basis-point rate cut might prompt the Reserve Bank of India's Monetary Policy Committee to continue its rate-cutting cycle. The MPC had cut the policy repo rate by 100 bps between February and June, before holding rates in August. Earlier this week, Morgan Stanley said in a research report that it expects the MPC to cut rates by 25 bps each in October and December as CPI inflation may undershoot the RBI's full year forecast of 3.1% for 2025-26 (Apr-Mar) by 70 bps.

"If the (FOMC) rate cut is as high a 50 basis point, the market will rally," a dealer at a private sector bank said. "...some traders are expecting a rate cut by the RBI in the October MPC meeting, but it will largely depend on the GDP growth data." India's next GDP print, for Jul-Sept, is scheduled for release on Nov. 28, a week before the December policy review.

Gilt traders are not considering a scenario where the FOMC does not cut rates Wednesday, based on US Federal Reserve Chair Jerome Powell's comments acknowledging the weakness in the labour market in August and sanguine comments on inflation, dealers said. However, if the FOMC does not cut rates, the 10-year gilt yield may climb to near 6.52% Thursday, they said.

Bonds maturing both under five years and over 15 years rose more than the 10-year benchmark gilt. While short-term bonds were in favour on hopes of a domestic rate cut, prices of the longer tenure bonds were aided by expectation the government might reduce the share of supply in these gilts in its Oct-Mar calendar. The calendar will likely be released by the end of the month. Some traders also considered the spread of the long-term bonds over the 10-year gilt lucrative, especially with a lack of supply of 30-50 year paper this week, dealers said.

The turnover in the gilts market was INR 203.65 billion, up from INR 152.50 billion at 1230 IST Tuesday, 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 6.46-6.52%. (Janwee Prajapati)

India Gilts: Up as US yields fall, rupee rises ahead of FOMC decision

India Gilts: Up as US yields fall, rupee rises ahead of FOMC decision

NEW DELHI--1000 IST--Prices of government bonds were higher Wednesday due to a slight overnight fall in US Treasury yields ahead of the Federal Open Market Committee's rate decision at 2330 IST, with traders betting on the panel cutting rates by 25 basis points as well as indicating further rate cuts, dealers said. A sharp rise in the rupee against the dollar also aided market sentiment.

Traders said a 25-basis-point rate cut in the US had already been factored into gilt prices, and further purchases from foreign portfolio investors may be limited before the outcome, dealers said. The yield on the 10-year US Treasury note eased 2 bps overnight to 4.03%, with the CME FedWatch tool showing only a 4% chance of a 50-bps rate cut. Some traders were betting on a "jumbo" rate cut, which is also seen providing more room for domestic rate cuts.

"Most of the positioning is happening before the FOMC, there is really no domestic trigger," a dealer at a private sector bank said. "If the FOMC is not very dovish or they continue to say they are data dependent, then the market could see some selling from these levels tomorrow (Thursday)."

A sharp rise in the rupee also supported gilt prices, as traders noted that a weaker rupee could be one of the reasons discouraging the Reserve Bank of India from cutting interest rates, dealers said. Bonds maturing before 2029 and the one-year overnight indexed swap rate were both reflecting some hopes of a rate cut by the Monetary Policy Committee in December, they said. The rupee rose 0.4% to 87.74 a dollar, its highest level since Aug. 28, due to a fall in the dollar index and increased optimism on a US-India trade deal.

Traders opted to buy the liquid 6.33%, 2035 gilt ahead of the FOMC outcome to position themselves more effectively for Thursday, dealers said. This was despite the bond's fresh supply of INR 300 billion this week. Gains were capped as some primary dealers placed short bets on the bond before the auction, though a majority of positions may be built in the latter half of Thursday or early Friday, dealers said. 

The turnover in the gilts market was INR 69.20 billion, up from INR 21.85 billion at 0957 IST Tuesday, 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 6.46-6.52%. (Aaryan Khanna)

India Gilts:Seen tad up on US yld fall, rupee rise before FOMC rate decision

MUMBAI – Prices of government bonds are seen opening slightly higher Wednesday, tracking an overnight fall in US Treasury yields, and a likely rise in the rupee against the dollar, ahead of the much-awaited US Federal Open Market Committee's meeting outcome later in the day. The FOMC is widely expected to cut interest rates by 25 basis points Wednesday, the first cut in the US since December. 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen moving in a range of 6.47-6.55% during the day. On Tuesday, the bond ended at INR 98.84 or 6.49% yield. The yield on the benchmark 10-year Treasury note was 4.03% as of 0800 IST, a tad lower than 4.05% at 1700 IST Tuesday. Caution before the key rate decision may limit trading activity and volumes may be low, dealers said. 

Bond prices may also track the movement in the rupee against the dollar during the day, dealers said. The rupee is seen surging above the key 88-per-dollar mark against the dollar on Wednesday as the dollar index slumped to an 11-week low on bets of a rate cut by the FOMC, dealers in the foreign exchange market said.

The CME's Fedwatch tool shows traders fully pricing in a 25-basis-point cut and around 4% of them expect a jumbo 50-bps cut Wednesday. US Federal Reserve Chair Jerome Powell's tone at the post-policy press conference will be keenly tracked and so will the Fed's economic projections. Traders are looking at a 75 bps of cuts by the end of 2025 in the US. While a 25 bps cut by the FOMC Wednesday is unlikely to change the perspective on India's rate cut cycle, a 50-bps cut could spur the Reserve Bank of India's Monetary Policy Committee to resume its rate cut cycle, dealers said. 

Foreign portfolio investors continued to bet on a widening interest rate differential between India and the US, with net gilt purchases worth INR 3.74 billion Tuesday through the fully accessible route, according to data from Clearing Corp. of India. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors. Any foreign inflows during the day may offset likely sales from mutual funds, and any placing of short bets by traders, dealers said. Some traders covered short bets Tuesday, but looming supply of the 10-year benchmark gilt Friday, worth INR 300 billion, may deter further short-covering, at least until the FOMC decision, they said. (Cassandra Carvalho)

End

US$1 = INR 87.82

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

Edited by Deepshikha Bhardwaj

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