Informist, Friday, Jul 21, 2023

By Nishat Anjum

MUMBAI – Government bonds erased most losses, tracking an intraday fall in overnight indexed swap rates, dealers said. However, traders avoided aggressive bets due to caution ahead of the US Federal Open Market Committee's meeting next week.

"The market should have ideally remained down, given the fundamentals. The movement shows that the market is still cautious about the Fed (US Federal Reserve)," a dealer at a private bank said. "The last-minute movement in swap rates looks like from offshore."

The 10-year benchmark 7.26%, 2033 bond closed at 101.24 rupees, or 7.08% yield, against 101.21 rupees, or 7.08% yield, on Thursday. 

The five-year swap rate fell to 6.31% from the day's high of 6.34%. Swap rates fell as traders unwound their paid fixed rate bets at a profit, dealers said.

Meanwhile, the result of the 310-bln-rupee bond auction was also largely along expected lines, which failed to give cues to the market. The government sold 70 bln rupees of the 7.17%, 2030 bond; 120 bln rupees of a new 2037 bond; and 120 bln rupees of the 7.25%, 2063 bond.
 

At the auction today, the Reserve Bank of India set the coupon on the new 2037 gilt at 7.18%. It also set the cut-off for the 7.17%, 2030 gilt at 100.36 rupees and for the 7.25%, 2063 gilt 99.41 rupees.

Dealers speculated that both state-owned and private banks stepped up purchases of the 2030 bond at the auction for their asset-liability management needs. The new 2037 bond also saw firm demand.

Meanwhile, a state-owned insurer and other private insurers were speculated to have bid for the 2063 bond at the auction. Dealers said demand from insurance companies for non-coupon bearing payments under the Separate Trading of Registered Interest and Principal Securities, or STRIPS, mechanism has increased.

Fresh demand for the gilt derivative may have added to the demand for longer-end bonds at the auction, dealers said.

STRIPS is a gilt derivative that allows buying and selling of a bond's cash flows--coupon payments and principal amount--as individual securities that are treated/structured like a zero coupon paper.

Moreover, long-term bonds also saw demand at the auction for forward rate agreements between banks and insurers, dealers said.  

For most of the trading session, prices of government bonds were down, tracking an overnight rise in US Treasury yields. The yield on the benchmark 10-year US Treasury note rose to 3.86% from 3.79% at the end of Indian market hours on Thursday. A rise in US Treasury yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing to foreign investors.

"3.85% (yield on the benchmark 10-year US bond) got breached, which was a crucial level, then crude has also crossed $80 per barrel, so market was down," a dealer at a primary dealership said. "Focus on crude is increasing day by day but not so much that a dollar-to-dollar rise would be tracked." 

Brent crude oil futures for September delivery were at $80.66 during the day, as against $79.64 on Thursday. Oil prices rose as traders remained worried about supply of the commodity after the US recently reported low crude inventories, and major oil-producing countries announced output cut extensions a few days back.

Meanwhile, US Treasury yields rose as weekly jobless claims data came in lower than expected. The data pointed to continued resilience in the labour market, stoking fear among investors that the US Federal Reserve may keep interest rates higher for a prolonged period.

Data from the US Labor Department showed the number of people filing for initial claims for jobless benefits declined 9,000 to a seasonally adjusted 228,000 in the week ended Jul 15. The figure was below the 242,000 claims forecast by economists in a Reuters poll. Declining for the second week in a row, the claims came stood at their lowest since mid-May.

By now, the market has largely factored in a 25-basis-point rate hike by the Federal Reserve on Jul 26. However, it is keenly awaiting the central bank's forward guidance, dealers said. According to the CME FedWatch tool, 99.9% of Fed fund futures traders expect a 25-bps rate hike on Wednesday.

On the domestic front, the market does not expect another rate hike, dealers said. However, traders are increasingly expecting the domestic inflation prints for the coming months to be above 6% due to monsoon-related disturbances. The RBI has an inflation target of 4%, while the tolerance band is 2-6%.

India's CPI inflation rose to a three-month high of 4.81% in June, primarily due to higher prices of key food items, mainly vegetables.

According to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform, the turnover today was 447.60 bln rupees, compared with 357.60 bln rupees on Thursday. Meanwhile, trades aggregating 150 mln rupees were settled in three deals with the digital rupee.

OUTLOOK

Bonds are not traded on Saturdays.

On Monday, government bonds may open steady as traders may avoid aggressive bets due to lack of significant domestic cues, dealers said.

Traders may also track any sharp movement in US Treasury yields and crude oil prices.

The yield on the 10-year benchmark 7.26%, 2033 bond is seen in a range of 7.05-7.12%.

India Gilts: Fall as US ylds rise; auction cut-offs on expected lines

MUMBAI--1350 IST--Prices of government bonds fell tracking a rise in US Treasury yields. Some traders also placed short bets, which weighed on the bond prices. 

The result of the 310-bln-rupee bond auction was largely along expected lines, which failed to give cues to traders. The government sold 70 bln rupees of the 7.17%, 2030 bond; 120 bln rupees of a new 2037 bond; and 120 bln rupees of the 7.25%, 2063 bond.

Both state-owned and private banks stepped up purchase of the 2030 bond at the auction, for their asset-liability management needs. The new 2037 bond also saw firm demand. "Actually, we were expecting around 7.15-7.16% as the coupon, but the cut-off was along market expectations," a dealer at a state-owned bank said. "I don't think insurers were there in this segment, just banks."

Dealers speculated that a stated-owned insurer and other private insurers bid for the 2063 bond at the auction. Dealers said demand from insurance companies for non-coupon bearing payments under the Separate Trading of Registered Interest and Principal Securities, or STRIPS, mechanism has increased, and it is possible that it reflected in the demand for longer-end bonds at the auction.

STRIPS is a gilt derivative which allows buying and selling of a bond's cash flows--coupon payments and principal amount--as individual securities that are treated/structured like a zero coupon paper.

The yield on the benchmark 10-year US Treasury note rose to 3.85% from 3.79% at the end of Indian market hours on Thursday. US Treasury yields rose as weekly jobless claims came in lower than expected. The data pointed at continued resilience in the US labour market, stoking fears among investors that the US Federal Reserve may keep the interest rates higher for a prolonged period.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 209.05 bln rupees at 1350 IST compared with 241.55 bln rupees at 1430 IST on Thursday.

For the rest of the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.07-7.12%. (Nishat Anjum)

India Gilts: In thin band; traders eye 310-bln-rupee auction result

NEW DELHI--1150 IST--Prices of government bonds were in a thin band as traders avoided aggressive bets, awaiting the result of the 310-bln-rupee auction held during 1030-1130 IST. The current 14-year benchmark 7.41%, 2036 paper was slightly up as expectation of strong demand for the new 2037 paper boosted market sentiment for the 14-year bond, dealers said.

"If after the auction, market goes down by 10-15 paise, you can go short in one paper and next day, give the new 14-year paper to the counterparty for cover," a dealer at a state-owned bank said. "Everybody wants to take position in the new paper." 

An informist poll sees the coupon on the new 2037 bond at 7.18%.

The government looked to sell 70 bln rupees of the 7.17%, 2030 bond; 120 bln rupees of a new 2037 bond; and 120 bln rupees of the 7.25%, 2063 bond, at the auction.

Dealers speculated that the 7.17%, 2030 bond may see firm demand at the auction from private and state-owned banks as the seven-year paper is a suitable duration for their asset-liability management requirement. Further, insurance companies were speculated to have bid aggressively for the 2063 paper.

The cut-off price on the 2030 paper is seen at 100.38 rupees, and that on the 2063 paper is seen at 99.34 rupees, according to the poll.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 141.20 bln rupees at 1150 IST compared with 127.15 bln rupees at 1237 IST on Thursday.

For rest of the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.07-7.13%. (Kasthuri Akhil)

India Gilts: Down tracking rise in US ylds; mkt awaits weekly auction

NEW DELHI--0945 IST--Prices of government bonds were down tracking an overnight rise in US Treasury yields. Losses were limited as traders maintained caution, awaiting the 310-bln-rupee gilt auction later in the day, dealers said.

"If 7.10% breaks, there is strong resistance at 7.14-7.15% technical levels (yield on 10-year benchmark 2033 paper). We need to see the auction now to see the appetite," a dealer at a private bank said. "After that we have the Fed (US Federal Reserve) policy, that will guide the direction."

The government will sell 70 bln rupees of the 7.17%, 2030 bond; 120 bln rupees of a new 2037 bond; and 120 bln rupees of the 7.25%, 2063 bond, at the auction from 1030 IST to 1130 IST.

Meanwhile, the yield on the benchmark 10-year US Treasury note rose to 3.85% from 3.79% at the end of Indian market hours on Thursday. A rise in US Treasury yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing to foreign investors.

US Treasury yields rose after data indicated a persistently tight US labor market, which raised concerns that the US Federal Reserve may keep interest rates higher for a prolonged period. While a hike of 25 basis points on Jul 26 is already factored in by the market, traders keenly await the Fed's forward guidance to gain insight on the future trajectory of rates in the US.

The data from the US Labor Department showed initial claims for unemployment benefits fell to a seasonally adjusted 228,000 for the week ended Saturday, below the 242,000 claims forecasted in a Reuters' poll. Further, declining for the second week in a row, claims were at their lowest level since mid-May.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was 40.75 bln rupees at 0945 IST compared with 29.95 bln rupees at 0930 IST on Thursday.

During the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.07-7.14%.  (Kasthuri Akhil)

India Gilts: Seen down as US ylds rise; 310-bln-rupee auction eyed

NEW DELHI – Prices of government bonds are seen opening lower tracking an overnight rise in US Treasury yields. However, traders may avoid placing aggressive bets due to caution ahead of the 310-bln-rupee gilt auction later today, dealers said.

At the auction, the government will sell 70 bln rupees of the 7.17%, 2030 bond; 120 bln rupees of a new 2037 bond; and 120 bln rupees of the 7.25%, 2063 bond.

Today, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.05-7.12% as against 7.08% on Thursday.

The yield on the benchmark 10-year US Treasury note rose to 3.85% from 3.79% at the end of Indian market hours on Thursday. A rise in US Treasury yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing to foreign investors.

US Treasury yields rose as weekly jobless claims data came in lower than expected. The data pointed at continued resilience in the labour market, stoking fears among investors that the US Federal Reserve may keep the interest rates higher for a prolonged period.

The data from the US Labor Department showed the number of people filing for initial claims for jobless benefit declined 9,000 to a seasonally adjusted 228,000 for the week ended Jul 15. The figure was below the 242,000 claims forecast by economists in a Reuters poll. Declining for the second week in a row, the claims came in at their lowest level since mid-May.

Meanwhile, the market has largely factored in a 25-basis-point rate hike by the Federal Reserve on Jul 26. However, it is keenly awaiting the central bank's forward guidance, dealers said. According to the CME FedWatch tool, about 99.9% of Fed fund futures traders expect a 25-bps rate hike next week. (Kasthuri Akhil)

End

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

Edited by Avishek Dutta

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