Informist, Wednesday, Mar 2, 2022

By Shubham Rana

NEW DELHI – Government bonds ended lower today because of growing fears of inflation rising in the near term after Brent crude oil prices breached the psychologically-crucial $110-per-barrel mark, dealers said.

The 10-year benchmark 6.54%, 2032 bond settled at 98.04 rupees or 6.81% yield, against 98.35 rupees or 6.77% yield on Monday.

Crude oil prices are at the highest level since 2014 because of fears of disruption in supply in the wake of Russia's invasion of Ukraine. Brent crude futures for May delivery rose around 5% from Tuesday's close of $104.97 per bbl, increasing concerns over further economic disruption and more persistent commodity pricing pressures.

Crude oil prices surged despite the International Energy Agency, which includes the US and Japan as members, agreeing to release 60 mln bbl from their reserves to check the rise in prices.

Typically, rise in crude oil prices increases risks of imported inflation in India and this would provide less room for the Reserve Bank of India to prolong its monetary policy accommodation.

The rise in crude prices may threaten the RBI's projected consumer inflation targets, particularly the Apr-Jun target of 4.9%, if prices do not fall by the end of the Jan-Mar quarter, dealers said.

Dealers are also of the view that if the Centre increases the price of petrol and diesel after the outcome of the five state assembly elections, due on Mar 10, inflation could rise further.

Fears of foreign portfolio investors reducing their gilt holdings amid a safe-haven rush also weighed on market sentiment, dealers said.

"Right now the people buying (gilts) don't know why they are buying, and the people selling (gilts) don't know why they are selling. There is so much uncertainty because of the geopolitical situation, it's really difficult to predict the market," said a dealer at a mutual fund house.

Losses were somewhat limited as the 10-year US Treasury yield fell below the 1.75% mark, dealers said.

Even as global investors rushed to haven assets, some traders bet on the US Federal Reserve taking it easy with respect to interest rate hikes in 2022 on account of uncertainty over economic growth because of the war in Ukraine, dealers said.

Traders will keep an eye on US Fed Chairman Jerome Powell's remarks at a Congressional hearing later today, for cues on whether the central bank will hike interest rates in March.

Meanwhile, the lack of fresh supply of dated securities in March is seen supporting market sentiment. The Centre has completed its scheduled borrowing for 2021-22 (Apr-Mar) and dealers don't expect any additional gilt issuance this month, especially after the government announced an additional 600-bln-rupee short-term borrowing through Treasury bills.

"Going ahead, there aren't many bond positive events. I don't see any reason for yields to come down on a sustainable basis, they can come down for a week, 10 days, possible. I don't see any sustainable positive in the next 2-4 quarters for the bond market," said Vikas Goel, managing director and chief executive officer of PNB Gilts.

According to data on the Reserve Bank of India's Negotiated Dealing System – Order Matching platform, the market-wide turnover was 215.25 bln rupees, as against 135.30 bln rupees on Monday.

The market was closed on Tuesday for Maha Shivratri.

OUTLOOK

Government bonds are seen opening steady on Thursday as traders may stay on the sidelines due to lack of significant cues.

Traders will look at new developments in the ongoing invasion of Ukraine by Russia for triggers, particularly for longer-dated government bonds.

Any sharp movement in crude oil price might also lend cues when the market opens.

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.76-6.86%.

India Gilts: Down as crude breaches $110/bbl, stokes inflation fears

NEW DELHI--1438 IST--Government bonds traded lower following a surge in Brent crude oil prices past the psychologically-crucial $110-per-barrel mark as Russia's invasion of Ukraine continued, raising worries of a severe supply shortage of crude oil, dealers said.

Brent crude futures for May delivery rose over 5.7% from Tuesday's close, even after member countries of the International Energy Association, including the US and Japan, agreed to release 60 mln bbl of crude oil into the market from their reserve stocks.

The rise in crude prices may threaten the RBI's projected consumer inflation targets, particularly the Apr-Jun target of 4.9%, if prices do not fall by the end of the Jan-Mar quarter, dealers said.

Fears of foreign portfolio investors reducing their gilt holdings amid a safe-haven rush weighed on market sentiment further, dealers said.

However, losses in domestic bonds were limited as the 10-year US Treasury yield fell below the 1.74% mark.

Even as global investors rushed to haven assets, some traders bet on the US Federal Reserve taking it easy with respect to interest rate hikes in 2022 on account of uncertainty over economic growth because of the war in Ukraine, dealers said.

Traders will keep an eye on US Fed Chairman Jerome Powell's remarks at a Congressional hearing later today, for cues on whether the central bank will hike interest rates in March.

"Rise in crude is the primary reason and there is also risk-off sentiment, which is affecting the market. Even as US yields are down, money is going out of domestic money markets, so a fall in US yields won't be supportive of domestic gilts," said a dealer at a state-owned bank.

Rest of the day, yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.78-6.84%. (Shubham Rana)

India Gilts: Down; crude, commodity price surge drives inflation fears

NEW DELHI--1115 IST--Government bonds fell today as traders trimmed their holdings on fears of increased inflation as commodity prices, including those of crude oil, surged, as the war between Russia and Ukraine intensified, dealers said.

Brent crude futures for May rose over 4.5% from Tuesday's settlement, and were around the psychologically-crucial $110 per barrel today.

Fears over supply disruption due to the Russian-Ukraine conflict even offset an agreement among member countries of the International Energy Association, including the US and Japan, to release crude oil into the market from their reserve stocks.

Higher oil prices may threaten the Reserve Bank of India's projected consumer inflation targets, particularly the Apr-Jun target of 4.9%, if prices do not climb down by the end of Jan-Mar, dealers said.

However, losses in government bond prices were limited as the 10-year US Treasury yield fell below the 1.75% mark.

Even as global investors rushed to haven assets, some traders bet on the US Federal Reserve taking it easy with respect to interest rate hikes in 2022 on account of uncertainty over economic growth following the start of the war in Ukraine, dealers said.

Meanwhile, the lack of supply of dated securities also aided market sentiment. The Centre has completed its scheduled borrowing for 2021-22 (Apr-Mar) and any additional gilt issuance in March is unlikely, dealers said.

Despite strong global triggers, traders kept to the sidelines as they awaited further cues from domestic policymakers, with the minutes of the Monetary Policy Committee's February meeting backing the benign inflation projections by the RBI for 2022-23, dealers said.

"It is a tricky market since the inflation issues are happening due to a war – if it ends tomorrow we could see immediate relief, but then we have to look at today's prices while discounting some things for the future," a dealer at a state-owned bank said.

Today, yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.77-6.83%.  (Aaryan Khanna)

India Gilts: Seen down on inflation fears as commodity prices surge

NEW DELHI – Government bonds are seen opening lower because a surge in prices of crude oil and other commodities due to the ongoing war between Russia and Ukraine is seen pushing up domestic inflation in the near term.

Crude oil futures rose over 7% on Tuesday to their highest level since 2014 due to fears of disruption in supply in the wake of Russia's invasion of Ukraine.

With the Russia-Ukraine conflict showing no signs of easing, and Moscow intensifying its attacks on the latter, concern has mounted over further economic disruption and more persistent commodity pricing pressures.

A global agreement to release crude oil reserves also failed to ease prices of the commodity. Members of the International Energy Agency, which includes the US and Japan, agreed to release 60 mln barrels of crude from their reserves to limit the sharp increase in prices.

Brent crude futures for May rose almost 5% more from Tuesday's settlement to breach the $110-per-bbl mark in Asian trade today. 

Typically, a rise in crude oil prices increases risks of imported inflation in India and provides less room for the Reserve Bank of India to prolong its monetary policy accommodation.

The price increases may threaten the RBI's projected consumer inflation targets, particularly the Apr-Jun target of 4.9%, if prices do not climb down by the end of the Jan-Mar quarter, dealers said. 

On the other hand, some market participants were of the view that the rise in crude oil prices may be transitory, dealers said.

Meanwhile, a sharp fall in the 10-year US Treasury yield, which plunged 11 basis points to 1.72%, is unlikely to support domestic gilts as the drop indicates rising demand for safe-haven assets.

Later today, US Federal Reserve Chair Jerome Powell's remarks at a Congressional hearing may lend cues on whether the central bank will hike interest rates in March.

Foreign portfolio investors have not cut their holdings of domestic debt, which may keep losses limited, but further safe-haven movements may spur a sell-off in domestic gilts, dealers said.

Traders may avoid aggressive bets with few cues on the domestic front and uncertainty due to geopolitical tensions, including crude prices in the near term, dealers said.

Today, yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.72-6.80%.  (Aaryan Khanna)

End

US$1 = 75.70 rupees

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

Edited by Ashish Shirke

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