Informist, Tuesday, Feb 6, 2024

By Anupreksha Jain

MUMBAI – Government bonds erased most gains due to a rise in US treasury yields and the Reserve Bank of India's multiple operations to draw out liquidity from the banking system, dealers said. However, firm demand from investors helped gilt prices remain afloat. Traders now await the outcome of the Monetary Policy Committee's meeting on Thursday.

The 10-year benchmark 7.18%, 2033 bond closed at 100.61 rupees, or 7.09% yield, compared with 100.59 rupees, or 7.09% yield, on Monday.

"The market opened slightly better despite a rise in US yields. But post VRRR (variable reverse rate repo) auction announcements, some selling started in the market," a dealer at a private bank said. "The market is keenly waiting for the MPC, particularly the governor's comments on liquidity management in the banking system. As the day passed by, the rise in US yields started weighing on gilt prices."

Today, the RBI conducted two overnight variable rate reverse repo auctions at 1030-1100 IST and 1230-1300 IST. The first auction saw banks park only 275.38 bln rupees of the 750 bln rupees notified. In the second one, banks parked 418.04 bln rupees of the notified amount of 500 bln rupees. Cut-offs at both the auctions were set at 6.49% and the reversal would take place on Wednesday.

The yield on the 10-year US Treasury note rose sharply after strong services sector growth data for January. The non-manufacturing Purchasing Managers' Index, which the Institute of Supply Management released on Monday, increased to 53.4 in January from 50.5 the previous month. The reading was also higher than the 52.0 projected in a Reuters poll. A figure above 50 indicates expansion, while one below it shows contraction.

The robust economic activity reinforced the belief that the US Federal Reserve is unlikely to cut interest rates at its next policy review in March. According to CME Group's FedWatch tool, only 16.5% of Fed Fund Futures traders expect a rate cut in March.

The 10-year benchmark US Treasury note rose to 4.15% from 4.09% at the time of Indian markets close on Monday. 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.

"Whatever data is coming from the US shows that more tightening of monetary policy is required," the dealer said. "US data has kept surprising the market. With every data, the expectations of rate cuts by the US Federal Reserve has been fading away." 

Last week, US non-farm payrolls data showed that the world's largest economy added 353,000 jobs in January, almost double the estimate. The unemployment rate was lower than expected at 3.7% in January, and wages grew more than forecast at 0.7% on month. With the delay in US rate cut expectations, India's monetary policy also has less room to soften, dealers said.

The MPC is likely to hold the repo rate at 6.50% at the policy outcome on Thursday, for the sixth straight meeting. Analysts are waiting to see if the RBI announces measures to improve liquidity in the banking system, an Informist poll showed. The majority view, however, is that the central bank will continue with its current liquidity operations involving variable rate repo and variable rate reverse repo tenders, the poll showed.

Some traders took aggressive bets early in the day, betting on liquidity conditions to become easier post the policy, as against Oct-Jan, or the rate-setting panel to signal loosening of monetary policy with a stance change to 'neutral' from the current 'withdrawal of accommodation'.

Moreover, investors considered levels lucrative enough to add to their portfolios across maturities, despite the rise in US yields and the upcoming policy decision, dealers said. "Till noon, investors were pretty active in the market, mostly active in all segments," a dealer at a state-owned bank said. "Investors are expecting the yield on the 10-year benchmark to fall to 7.00%, going forward. So, the situation was buy now and sell later."

Insurers heavily bought long-term papers as the government's borrowing programme ends on Feb 16, after which there will be no supply of gilts until April. Also, owing to the cut in gross borrowing in the next financial year starting April, these investors expect a fall in supply of long-term gilts while their appetite may increase, dealers said. The government has pegged its gross borrowing in 2024-25 at 14.13 trln rupees, as against 15.43 trln rupees this year.

Furthermore, investors bought gilts ahead of the inclusion of India's bonds on global bond indices. JP Morgan will add Indian gilts to its Global Bond Index – Emerging Markets starting June, while Bloomberg has proposed to add bonds under the fully-accessible route to its emerging market indices starting September.

State-owned banks were buying gilts maturing in up to 10 years, whereas insurance companies were selling the 10-year benchmark paper in the secondary market and stocking up on long-term gilts, dealers speculated. Private banks also bought some quantum of the 7.18%, 2033 paper in the secondary market, they speculated.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the turnover today was 466.40 bln rupees, largely similar to 468.95 bln rupees on Monday. No trades were carried out using the wholesale digital rupee pilot today, as against two trades amounting to 100 mln rupees on Monday.

OUTLOOK

On Wednesday, gilts may open steady as traders may refrain from placing aggressive bets due to caution ahead of the Monetary Policy Committee's meeting outcome on Thursday, dealers said. The RBI's variable rate reverse operations, meant to withdraw liquidity in the banking system, may weigh on gilt prices.

On Wednesday, the central bank will conduct an overnight, 500-bln-rupee reverse repo tender at 1030-1100 IST. This comes after it mopped up 693.42 bln rupees through two overnight variable rate reverse repos today.

Any sharp movement in US Treasury yields or crude oil prices may also lend cues at the open.

The yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.06-7.12% during the day. 

India Gilts: Erase some gains but remain up on investors' firm demand

MUMBAI--1515 IST--Government bonds erased some gains, the reason for which the market was divided on. However, firm demand from investors kept the gilts on the higher side, dealers said.

A section of the market said that the second overnight variable rate reverse repo auction held today might have dampened market sentiment. In the second overnight variable rate reverse repo auction for a notified amount of 500 bln rupees held at 1230-1300 IST today, banks parked 418.04 bln rupees at a cutoff of 6.49%. However, some disagreed.

"I don't understand how the market traded that high in the morning... US yields were up," a dealer at a state-owned bank said. "The current levels in the market seem realistic to me. Maybe it is just a correction." Earlier in the day, the market opened higher as investors stepped up their purchases of gilts at yield levels considered lucrative, disregarding the rise in US Treasury yields, dealers said.

Dealers speculated that state-owned banks and private banks might have purchased the benchmark 10-year bond. Insurance companies purchased gilts with tenures of 30 years and above, while mutual funds purchased gilts with tenures below 10 years.

Dealers added that the positive sentiment is due to India's inclusion in the JP Morgan's Global Bond Index – Emerging Markets in June. They speculated that primary dealerships might be catering to the buying side.  

Meanwhile, yield on the 10-year benchmark US Treasury note rose to 4.14% from 4.09% at the time of Indian markets close on Monday. US yields rose as investors digested the non-manufacturing Purchasing Managers' Index data for January, which was at 53.4 in January, against 50.5 the previous month. It was also higher than the forecast of 52.0 in a poll of economists by Reuters.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 346.95 bln rupees, as against 395.95 bln rupees at 1530 IST on Monday.

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: Remain up; market disregards uptick in US yields

MUMBAI--1234 IST--Prices of government bonds remained up as investors stepped up purchases of gilts across segments ahead of the inclusion of Indian government bonds in JP Morgan's Global Bond Index – Emerging Markets Index, dealers said. Bonds with over 30 years of maturity saw aggressive buying from insurance companies, dealers said. 

"Investors are pretty much active in every segment as they expect the yield on the 10-year benchmark, 7.18%, 2033 to fall to 7.00% in the near future due to bond inclusion," a dealer at a private bank said. "Insurers are grabbing long-term papers as after Feb 16 there will be no primary issuances of the long-term papers." JP Morgan will add Indian gilts to its Global Bond Index – Emerging Markets starting June, while Bloomberg has proposed to add bonds under the fully-accessible route to its emerging market indices starting September.

Dealers speculated that state-owned banks were buying short-term papers with maturity of five and seven years, and the 10-year paper, whereas insurance companies were selling the 10-year benchmark paper in the secondary market. State-owned banks and private banks were buying the benchmark 10-year paper. Meanwhile, state-owned banks were selling the 30-year paper, dealers said. 

Good demand was seen at the state loan securities auction, held from 1030-1130 IST today, dealers said. The 10-year paper at the auction was mostly picked up by investors. The long-term papers saw aggressive demand from the usual participants, insurance companies and pension funds, dealers said. Mutual funds were seen aggressively buying short-term papers, especially Gujarat's seven-year paper, dealers said. The market may take fresh cues from the state loan securities auction result today. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 198.20 bln rupees, as against 255.40 bln rupees at 1230 IST on Monday. During the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.05-7.10%. (Anupreksha Jain)

India Gilts: Up on investors' firm demand; mkt eyes MPC outcome Thu

MUMBAI--0955 IST--Prices of government bonds were up as investors stepped up their purchases of gilts at yield levels considered lucrative, dealers said. The market disregarded a rise in US Treasury yields.

"Slightly good opening despite a rise in US yields. It looks like the market is getting some support from investors," a dealer at a private bank said. "Also, some positioning is happening before the RBI's (Reserve Bank of India) MPC (Monetary Policy Committee) meeting outcome as most of the market participants expect their stance to change to neutral."

Traders refrained from placing aggressive bets on caution ahead of the outcome of the three-day meeting, due Thursday, dealers said. The market is keenly looking forward to the outcome for clear guidance from the RBI on the liquidity front, after its periodic measures to both infuse and draw out liquidity through variable rate repo and reverse repo operations, respectively, dealers said. Between Dec 15 and Jan 30, the RBI conducted 11 variable rate repo auctions to help fund the liquidity deficit in the banking system, but has announced three variable rate reverse repo operations since Friday.

A section of the market expects a softer tone from RBI Governor Shaktikanta Das on liquidity in the banking system. However, some believe the recent variable rate reverse repo auctions are a sign that the central bank might not allow liquidity to be in any surplus anytime soon, dealers said. On Monday, the liquidity deficit in the banking system was 1.22 trln rupees, as against a record high of 3.46 trln rupees on Jan 24.

Dealers said rate cuts in India might only begin from September, against earlier expectations of June, if the US Federal Reserve starts cutting rates in the middle of the calendar year. Meanwhile, the MPC is likely to hold the repo rate at 6.50% at its three-day meeting for the sixth straight meeting. 

Dealers speculated that foreign banks were continuing to sell gilts, same as Monday. Moreover, dealers said that private banks were also buying the 10-year paper as they expect the yield on the 10-year paper may fall to 7.00% going forward.

The 10-year benchmark US Treasury note rose to 4.13% from 4.09% at the time of Indian markets close on Monday. US yields rose as investors digested the non-manufacturing purchasing managers' index data for January, which was at 53.4 in January, against 50.5 the previous month. It was also higher than the forecast of 52.0 in a poll of economists by Reuters. A figure above 50 indicates expansion, while below indicates contraction. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 66.75 bln rupees, as against 150.65 bln rupees at 1030 IST on Monday.

During the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.05-7.10%. (Anupreksha Jain)

India Gilts: Seen opening lower tracking overnight rise in US yields

MUMBAI – Prices of government bonds are seen opening lower as US Treasury yields rose overnight, dealers said. However, the losses might be limited as traders may avoid placing aggressive bets ahead of the outcome of the three-day meeting of the Reserve Bank of India's Monetary Policy Committee, due Thursday. The yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.07-7.12% today, against 7.09% on Monday.

The market will see if the RBI announces measures to improve liquidity in the banking system, an Informist poll showed. Liquidity has remained tight since the last meeting of the Monetary Policy Committee in December. The liquidity deficit, which rose to a record 3.46 trln rupees in January, has since improved to 1.4 trln rupees due to the government's month-end spending. The majority view, however, is that the central bank will continue with its current liquidity operations involving variable rate repo and variable rate reverse repo tenders, the poll showed.

The market may take cues from investors' appetite at the state loan securities auction scheduled for 1030-1130 IST, dealers said. At the auction today, 14 states will raise 267.10 bln rupees through issuance of bonds.

Meanwhile, the yield on the 10-year benchmark US Treasury note rose to 4.13% from 4.09% at the time of Indian markets close on Monday. 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 investors digested the non-manufacturing purchasing managers' index data for January, which was at 53.4 in January, against 50.5 the previous month. It was also higher than the forecast of 52.0 in a poll of economists by Reuters. A figure above 50 indicates expansion, while below indicates contraction. 

The strong service sector growth for January reinforced beliefs that the US Federal Reserve is unlikely to cut interest rates anytime soon. According to the CME Group's FedWatch tool, 85% of Fed fund futures traders expect the federal funds interest rate to remain at 5.25-5.50% in the coming meeting in March. However, 54% of them expect a 25-basis-point rate cut in May. (M.C. Adhiinthran) 

End

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

Edited by Avishek Dutta

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