Informist, Friday, Feb 23, 2024

By M.C. Adhiinthran

MUMBAI – Prices of government bonds ended slightly lower today as US Treasury yields rose intraday. The minutes of the February meeting of the Reserve Bank of India's Monetary Policy Committee also failed to lend cues, dealers said. Market volumes were lacklustre and concentrated in longer-tenure bonds as the liquidity deficit in the banking system did not favour short-term bonds, they said. 

The 10-year benchmark 7.18%, 2033 bond closed at 100.70 rupees, or 7.08% yield, compared with 100.76 rupees, or 7.07% yield, on Thursday.

"Fridays have always been quite active because of the (gilt) auction," a dealer at a state-owned bank said. "After the auctions ended, I thought the secondary market would see good buying, but that largely happens only when FPIs (foreign portfolio investors) are there, and it's clear that they were not there today."

Weekly gilt auctions for 2023-24 (Apr-Mar) ended last week, with no devolvement in the government's record 15.43 trln rupee gross borrowing programme for the first time in over a decade. 

Prices were largely unchanged in the earlier part of the trading session as the market lacked firm cues, dealers said. US Treasury yields were not traded during Asian market hours as the Japanese financial markets were shut to celebrate the emperor's birthday. The Treasury bills were traded in European market hours, thereby lending cues to the domestic market for the latter part of the trading session, dealers said.

The yield on the 10-year benchmark US Treasury note rose to 4.34%, from 4.31% at the close of Indian market hours on Thursday. A rise in US yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing to foreign investors.

US yields rose as weekly initial unemployment claims were lower than expected, which pushed back expectations of a rate cut by the US Federal Open Market Committee. Data released by the US Labor Department on Thursday showed initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 201,000 in the week ended Saturday. Economists polled by Reuters had forecast the claims at 218,000.

According to the CME FedWatch Tool, rate cut expectations have been almost entirely wiped out at the next FOMC meeting in March, and only 21.0% of Fed fund futures traders expect a rate cut even at the meeting in May. It is only in mid-June that 64.7% of traders expect a cut of at least 25 basis points.

Today, state-owned banks were speculated to have picked up the 10-year benchmark gilt at the 7.08% yield level, which is considered lucrative. They were net buyers on Thursday, data from the Clearing Corp of India Ltd showed. Private banks and primary dealerships were speculated to have trimmed their holdings. Primary dealerships were the top net sellers while private banks were net sellers on Thursday.

Amid thin trade, short-term bonds were not favoured on account of the prevailing liquidity deficit, dealers said. The liquidity deficit in the banking system was at 2.37 trln rupees at the end of trade on Thursday, against 2.52 trln rupees on the previous day, data from the RBI showed. The banking system liquidity has remained in a deficit of over 1 trln rupees since mid-December, keeping short-term bonds mostly out of favour since then.

"Besides your usual ALM (asset-liability management) picking, no one really wants to pick them (short-term bonds) up," a dealer at a private bank said. "Steps from the RBI's side on the liquidity front should come. Only then would short-term bonds become lucrative again."

Some traders picked up illiquid securities from the secondary market for their portfolios at levels considered lucrative, an activity that has been consistent over the past week, dealers said. The 7.10%, 2029 bond, 6.54%, 2032 bond, 7.40%, 2062 bond, and the 6.80%, 2060 bond, all former benchmarks of varying tenures, were among the illiquid securities that were traded in the secondary market. However, some dealers speculated that the illiquid securities might have been purchased by FPIs, as the bonds are eligible under the fully accessible route.

Meanwhile, the minutes of the Monetary Policy Committee's meeting, released at 1700 IST on Thursday, were in line with market expectations. Members of the domestic rate-setting panel drew comfort from resilient growth, which was better than their expectations, in holding the policy repo rate at 6.50% and maintaining the stance at "withdrawal of accommodation" at the Feb 6-8 meeting, the minutes showed. They flagged risks from food inflation, though core inflation-–which fell to under 4% for the first time in four years in December-–gave them the confidence to hold rates.

The lone dissenter on the status quo, external member Jayanth Varma, voted for a rate cut--the first such vote since May 2020. Varma said the real policy repo rate of 2%, calculated as the difference between the nominal policy rate and inflation in 2024-25 (Apr-Mar), projected by the RBI to average 4.5%, is too high and would stifle economic growth, as the economy has not overheated. Other members felt rate cuts were premature at the current juncture.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the turnover today was 258.40 bln rupees, down from 387.90 bln rupees on Thursday. The volumes were at their lowest in a month. Eight trades worth 900 mln rupees were carried out using the wholesale digital rupee pilot today, as against two trades worth 500 mln rupees on Thursday.

OUTLOOK

The gilts market is shut on Saturday. On Monday, bond prices may open steady as traders may lack firm domestic cues, dealers said. Any sharp movement in US Treasury yields or crude oil prices may lend cues at the opening.

The yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.04-7.12% during the day.

India Gilts: Tad down tracking rise in US yields in European trade

MUMBAI--1542 IST--Prices of government bonds were down marginally, tracking the rise in US Treasury yields in European trade, dealers said. The volumes, however, were dull and concentrated in long-term bonds as the liquidity deficit in the banking system made trade in short-term bonds unfavourable.

Dealers speculated that state-owned banks were buying the 7.18%, 2033 gilt at the psychologically crucial 7.08% yield level. They were net buyers of government bonds on Thursday, data from the Clearing Corp of India Ltd showed. Primary dealerships and private banks were speculated to be trimming their holdings. Primary dealerships were the top net sellers while private banks were net sellers on Thursday. "The level is good for buying though, so yields might not rise as much as more participants would look at buying," the dealer at a private-bank said. 

The yield on the 10-year benchmark US Treasury note rose to 4.35%, from 4.31% at the close of Indian market hours on Thursday. US yields rose as the initial unemployment claims were lower than expected, which pushed back expectations of a rate cut by the US Federal Open Market Committee.

The liquidity deficit in the banking system was at 2.37 trln rupees at the end of trade on Thursday, as against 2.52 trln rupees on the previous day, data from the RBI showed. "Conditions are not the best for short-term bonds," the dealer quoted above said. "Two things have to align for it to become favourable. First and most importantly, the liquidity conditions, which do not look favourable anytime soon. Second is the rate-cut expectation, which has remained the same." The market expects a rate cut in the policy repo rate of 6.50% from the Reserve Bank of India in October, dealers said.  

Amidst low volumes in short-term bonds, some banks were speculated to have picked them up to match their liabilities. Some traders also picked up illiquid securities from the secondary market to park in their portfolios at levels considered lucrative, an activity that has been consistent over the past week, dealers said. The 7.10%, 2029 bond, 6.54%, 2032 bond, 7.40%, 2062 bond, and the 6.80%, 2060 bond – all former benchmarks of varying tenures -- were among the illiquid securities that changed hands.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 208.25 bln rupees compared with 296.05 bln rupees at 1530 IST on Thursday. For the rest of the day, the yield on the 10-year benchmark, 7.18%, 2033 bond, is seen at 7.05-7.10%.  (M.C. Adhiinthran)

India Gilts: Largely unchanged; MPC meet minutes fail to lend fresh cues

MUMBAI--1322 IST--Prices of government bonds remained largely unchanged as traders avoided aggressive bets due to lack of firm domestic cues. The minutes of the Monetary Policy Committee's most recent meeting failed to lend fresh cues to the market, which also led to dull trading volumes.

The minutes of the Feb 6-8 meeting showed that the panellists were largely comfortable with the policy repo rate remaining at 6.50% for longer and the stance as 'withdrawal of accommodation'. External member Jayanth Varma voted for a 25-basis-point rate cut and a stance change to 'neutral' as he felt the economy can achieve its growth rate without overheating even after a rate cut. Ashima Goyal also preferred easier monetary conditions, which has been the case for several policy meetings now, dealers said.

Reserve Bank of India Governor Shaktikanta Das and Deputy Governor Michael Patra did not see the need to cut rates anytime soon. In fact, RBI Executive Director Rajiv Ranjan said that markets around the world, including India, are running ahead on rate cut expectations.

"MPC minutes did not show anything new," a dealer at a state-owned bank said. "That was looked at as a market mover for today, but nothing was there in the minutes for market to move."

Traders speculated that state-owned banks were buying bonds as the 10-year benchmark gilt yield neared 7.08%, while private banks and primary dealerships trimmed their portfolios. Primary dealerships were the top net sellers in the previous trading session, Clearing Corp of India data showed.

US Treasury yields may lend cues after European markets open, dealers said. US Treasuries were not traded in Asia as financial markets in Japan were shut for Emperor Naruhito's birthday. The yield on the 10-year US Treasury note rose to 4.33% from 4.31% at close of Indian market hours on Thursday. US yields rose as the initial unemployment claims were lower than expected, which pushed back expectations of a rate cut by the US Federal Open Market Committee.

Data released by the US Labor Department on Thursday showed initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 201,000 in the week ended Saturday. Economists polled by Reuters had forecast the claims at 218,000.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 135.95 bln rupees compared with 195.00 bln rupees at 1330 IST on Thursday.

For the rest of the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.05-7.10%.  (M.C. Adhiinthran)

India Gilts: Steady in choppy trade as MPC minutes fail to lend cues

NEW DELHI--0945 IST--Prices of government bonds were little changed in choppy trade as the minutes of the Monetary Policy Committee's February meeting failed to lend more clarity on India's future rate trajectory, dealers said. The Reserve Bank of India's announcement of an additional operation on Monday to inject liquidity improved market sentiment, but was not enough to offset the impact of an overnight rise in US yields.

The minutes of the Feb 6-8 meeting showed that the six-member panel was broadly comfortable with the growth inflaton trajectory going ahead and did not want to tinker with rates prematurely. Stronger-than-expected growth, as well as falling core inflation, were cited by most as reasons for the status quo on the repo rate and policy stance of "withdrawal of accommodation". External members Jayanth Varma, who voted for a rate cut at the meeting, and Ashima Goyal seemed to prefer easier monetary conditions, which has been the case for several policy meetings now, dealers said. On the other hand, RBI members, including Governor Shaktikanta Das and Deputy Governor Michael Patra, still seemed unwilling to suggest rate cuts were on the table, dealers said. In his minutes, RBI Executive Director Rajiv Ranjan said that markets around the world, including India, are running ahead on rate cut expectations.

"The market pulled back into positive territory because of the announcement of the additional VRR (variable rate repo)," a dealer at a state-owned bank said. "Other than that, the minutes really have not impacted the market at all... all the comments were in line (with our view)."

Today, only a couple of minutes after the market opened, the RBI announced it would conduct a 1.5-trln-rupee, three-day variable rate repo auction on Monday as a fine-tuning operation. The central bank is scheduled to hold a 1-trln-rupee, 13-day variable rate repo auction at 1030-1100 IST, which has disappointed some traders as 3 trln rupees of liquidity from variable rate repo tenders are scheduled to mature today. At the end of trade on Thursday, liquidity deficit in the banking system was at 2.37 trln rupees, as against 2.52 trln rupees at the end of trade on Wednesday, according to data from the RBI.

On the global front, the yield on the 10-year US Treasury note rose to 4.33% in Asian trade today, as against 4.31% at the close of Indian market hours on Thursday, after the weekly unemployment claims data, released Thursday, came in lower than expected. According to the CME FedWatch tool, less than half Fed funds futures traders expect a rate cut even in June, as against an earlier consensus view of a rate cut in March. A rise in US yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing to foreign investors.

Unlike earlier this week, foreign portfolio investors' demand for gilts may be muted after fresh US economic data reduced hopes of rate cuts in the world's largest economy and, consequently, cemented expectations of rate cuts in India only in October. However, some investor buys of the 2033 and 2037 dated bonds may still happen later in the day ahead of India's inclusion in JP Morgan's emerging market index suite in June, and expected inclusion in Bloomberg's Emerging Market Local Currency Index, starting September, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 55.20 bln rupees, as against 49.00 bln rupees at 0930 IST on Thursday. During the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.05-7.10%.  (Aaryan Khanna)

India Gilts: Seen steady as Feb MPC meet minutes in line with view

NEW DELHI – Government bond prices are likely to open steady as the minutes of the Monetary Policy Committee's February meeting were in line with the market's expectations, largely unchanged from the commentary in the policy itself, dealers said. A slight rise in US Treasury yields overnight may weigh on gilt prices. 

The yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.02-7.08%, against 7.07% on Thursday. 

Members of the Monetary Policy Committee drew comfort from resilient growth, which outperformed their expectations, in holding the policy repo rate at 6.50% and maintaining the policy stance at "withdrawal of accommodation" in their Feb 6-8 meeting, the minutes released after market hours on Thursday showed. Several members cheered the core inflation print, as the metric, which strips out volatile components like food and fuel, fell below the 4% mark for the first time in four years in December. But the panel still remained cautious of food inflation pressures, and the majority was in favour of holding rates to gauge further economic impacts of past rate hikes.

However, members could not avoid speaking on rate cuts, which was keenly awaited by analysts and financial market participants. The lone dissenter on the status quo, external member Jayanth Varma, had voted for a rate cut--the first such vote since May 2020. The real policy repo rate of 2% as calculated by Varma was the nominal policy rate over projected inflation in 2024-25 (Apr-Mar), which the RBI projected to average 4.5% for the full year.

"I do not believe that such a high real rate is required at this stage to drive inflation down to the target of 4%," Varma said in his minutes. "It is true that economic growth is holding up well, but there is no evidence at all that the economy is overheating." External member Ashima Goyal also acknowledged that the RBI's CPI inflation projection for 2024-25 gave room to cut rates.

While the MPC's minutes may not change much, a slew of economic data in the US led to an uptick in US Treasury yields, which may dampen the enthusiasm for foreign investors to continue piling into gilts as they have in the recent past, dealers said. FPIs have bought 338.47 bln rupees worth of index-eligible gilts so far in 2024, ahead of Indian inclusion on JP Morgan's debt indices in June. The yield on the 10-year US Treasury note rose to 4.33% at 0835 IST, from 4.31% at the end of Indian market hours on Thursday.

In the US, the labour market remained resilient as data showed unemployment claims were less than expected. Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 201,000 for the week ended Saturday, the labor department said on Thursday. Economists polled by Reuters had forecast 218,000 claims for the latest week.

According to the CME FedWatch Tool, only 24.7% of Fed fund futures traders expect a rate cut in May, and around 49.7% of traders now expect a 25-basis-point rate cut in mid-June. The personal consumption expenditures data, due next week, may be the next major release to provide cues on the US Federal Reserve's policy path going ahead.

Short-term bonds may underperform their peers, after the RBI announced it would conduct only a 1-trln-rupee, 13-day variable rate repo operation at 1030-1100 IST, while 3 trln rupees worth of the central bank's liquidity injection are reversing today. The increase in fine-tuning liquidity operations, sometimes announced and conducted on the same day, as well as a lack of predictability in government spending are both undermining traders' comfort in bidding aggressively maturing up to five years, dealers said.  (Aaryan Khanna)

End

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

Edited by Rajeev Pai

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