Informist, Monday, Apr 11, 2022

By Aaryan Khanna

NEW DELHI – Most government bonds ended off lows today, taking cues from the recovery in the 10-year benchmark 6.54%, 2032 bond, as traders stepped up purchases noting a fall in prices since the outcome of the monetary policy on Friday, dealers said.

Market participants were also cautious about the Reserve Bank of India's comfort with the recent surge in yields.

The 10-year benchmark 6.54%, 2032 bond settled at 95.76 rupees, or 7.15% yield, against 95.96 rupees or 7.12% yield on Friday.

Traders had placed large short bets early in the day after the Monetary Policy Committee indicated it would move towards withdrawing policy accommodation, while also making room for the large supply of gilts at auction on Wednesday.

The policy panel's decision to target inflation over growth, the first time it has done so in three years, led traders to trim holdings anticipating a sharper pace rate hikes, particularly after the RBI raised its forecast for consumer inflation by 120 basis points to 5.7% for the current financial year ending March.

At the day's low, the price of the 10-year benchmark 6.54%, 2032 bond had fallen 1.84 rupees since its close on Thursday, marking a 27-basis-point jump in yield.

Bonds also fell tracking a surge in US Treasury yields ahead of CPI data on Tuesday, with consumer inflation in the US estimated to hit a fresh four-decade high of 8.3%.

Globally, markets priced in the risk of ever-larger rate hikes from the Federal Reserve, with expectation of a 50-bps hike at both the May and June meetings as the US central bank moves to curb surging inflation through a mix of rate hikes and balance sheet cuts.

The yield on the 10-year benchmark US Treasury note rose 6 bps to settle at 2.72% on Friday, and rose further up to 2.76% at the end of Indian market hours today. A rise in US Treasury yields narrows the interest rate differential between the haven asset and emerging market debt, making the latter less appealing to foreign investors.

After the early fall, investors stepped up purchases at levels they viewed the RBI would not be comfortable with elevated yields, with the 10-year benchmark yield nearing the psychologically-crucial 6.20% mark.

"There was significant short covering starting in the middle of the day that rose and rose, the early movement caught a lot of people off-guard, so there was some scope to cover and pick up stock at decent levels even before auction," said a dealer at a state-owned bank.

Traders avoided stocking up on gilts ahead of the 330-bln-rupee gilt auction Wednesday, including 130 bln rupees of the 10-year benchmark 6.54%, 2032 gilt, in a curtailed week. Financial markets will be shut on Thursday and Friday for Ambedkar Jayanti and Good Friday, respectively.

Moreover, consumer inflation is likely to breach the RBI's target band of 2-6%, which further weighed on gilts, dealers said. CPI inflation in March is expected to hit a 16-month high of 6.4%, according to the median of an Informist poll of 18 economists. The data will be released on Tuesday.

Meanwhile, the yield on the 5-year benchmark 5.74%, 2026 bond rose the most among on-the-run gilts as traders shed fresh stock picked up at the auction last week. The Centre raised 90 bln rupees through the gilt on Friday.

The bond was out of favour among traders and has underperformed its peers since the policy outcome as it was likely to bear the brunt of the Centre's supply in the five-year segment in Apr-Sep while being faced with a more aggressive cycle of rate hikes by the RBI.

While the 10- and 14-year benchmark gilts are likely to go off-the-run soon, the 2026 paper has an outstanding of only 360 bln rupees and will likely be issued for several more auctions, dealers said.

"It is a problem or weakness specific to the 5.74%, 2026 bond I think. It has definitely been the biggest pain point since the policy because of the dynamics on how supply is going to work. There is enough room for the government to issue all the five-year borrowing in this paper," a dealer at a private bank said.

According to data on the RBI's Negotiated Dealing System – Order Matching platform, the market-wide turnover was 281.95 bln rupees, as against 369.20 bln rupees on Friday.

OUTLOOK

On Tuesday, gilts may open steady on caution ahead of CPI data for March that will be released after market hours.

Consumer inflation in March is expected to hit a 16-month high of 6.4%, according to the median of an Informist poll of 18 economists, breaching the RBI's target band of 2-6%.

Traders may trim holdings in the face of RBI's move away from policy accommodation and the steady supply of bonds.

A truncated week may also lead to volatility in the market ahead of the 330-bln-rupee gilt auction on Wednesday. Money markets will be shut on Thursday and Friday for Ambedkar Jayanti and Good Friday, respectively. 

The government has offered to sell 40 bln rupees of the 4.56%, 2023 gilt, 70 bln rupees of a new 2029 bond, 130 bln rupees of the 6.54%, 2032 gilt and 90 bln rupees of the 6.95%, 2061 gilt on Wednesday.

Traders may also be cautious before the release of US CPI data for March after market hours Tuesday.

Any sharp movement in crude oil prices and US Treasury yields may lend cues when the market opens.

Yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.10-7.20%.

India Gilts: Off lows on value buying; RBI comfort with yld jump eyed

NEW DELHI--1440 IST--Government bonds were off lows as traders stepped up purchases citing lucrative levels after a sharp fall in prices following the outcome of the Monetary Policy Committee's meeting on Friday, dealers said.

At the day's low, the price of the 10-year benchmark 6.54%, 2032 bond had fallen 1.84 rupees since its close on Thursday, before the policy outcome, marking a 27-basis-point jump in yield.

Traders were uncertain about the Reserve Bank of India's comfort with higher yields, with central bank officials reiterating that all the tools were on the table to ensure the Centre's record borrowing programme in 2022-23 (Apr-Mar) goes through, dealers said.

The market is expected to remain volatile as traders make aggressive bets in a data-heavy week with only three trading days. CPI data for both the US and India is scheduled to be released on Tuesday, before the 330-bln-rupee bond auction on Wednesday.

CPI inflation in March is expected to hit a 16-month high of 6.4%, according to the median of an Informist poll of 18 economists.

"I don't think the RBI has intervened on-screen (in the secondary market), but there is a concern that there could be an OMO announced very quickly and shorts would get wiped if we are looking at 7.20% already and (March) CPI (inflation) is going to hit the market negatively," a dealer at a state-owned bank said.

Today, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.11-7.16%.  (Aaryan Khanna)

India Gilts: Fall on jump in US ylds; sentiment weak post MPC outcome

NEW DELHI--1035 IST--Government bonds fell as a jump in US Treasury yields amplified the weak market sentiment following the outcome of the Reserve Bank of India's Monetary Policy Committee meeting on Friday, where it indicated it would shift away from its accommodative stance soon, dealers said.

US yields rose on bets of aggressive rate hikes by the US Federal Reserve, ahead of the scheduled release of US CPI data on Tuesday. The US inflation print in March is set to hit a fresh 40-year high from the fallout of elevated global commodity prices.

The yield on the 10-year benchmark US Treasury note surged 6 basis points on Friday, and another 5 bps in Asian trade today to 2.77%.

The market made room for a heavy supply of gilts at the weekly auction on Wednesday in a truncated week. The government has offered to sell 330 bln worth of four gilts on Wednesday, including 130 bln rupees of the 6.54%, 2032 bond.

Traders placed short bets on the 10-year benchmark gilt, anticipating they would be able to cover their positions at the bond auction. The RBI refrained from announcing open market operations at the outcome of the policy meet, and traders are looking to test the central bank's comfort with higher yields, dealers said. 

Moreover, volumes may be bunched up as money markets are closed on Thursday and Friday, with traders prepared to place aggressive bets after the policy outcome, dealers said.

"The movement has been sharp because the RBI stance is now clear, it's time to end whatever steps they had taken to cap yields, they don't seem too interested in expanding their balance sheet further, and if the market is left on its own this is closer to the fair value which will rise at every auction now," a dealer at a primary dealership said.

Moreover, consumer inflation is likely to breach the RBI's target band of 2-6% when it is released on Tuesday, which further weighed on gilts, dealers said. CPI inflation in March is expected to hit a 16-month high of 6.4%, according to the median of an Informist poll of 18 economists.

Today, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.13-7.19%, against 7.12% on Friday.  (Aaryan Khanna)

India Gilts: Seen down on jump in US yields, ahead of auction on Wed

NEW DELHI - Government bonds may open lower tracking a surge in US Treasury yields ahead of the CPI report scheduled for Tuesday, with consumer inflation in the US estimated to hit a fresh four-decade high of 8.3%.

Globally, markets priced in the risk of ever-larger rate hikes from the Federal Reserve, with expectation of a 50-basis-point hike at both the May and June meetings as the US central bank moves to curb surging inflation through a mix of rate hikes and balance sheet cuts.

The yield on the 10-year benchmark US Treasury note rose 6 basis points to settle at 2.72% on Friday. A rise in US Treasury yields narrows the interest rate differential between the haven asset and emerging market debt, making the latter less appealing to foreign investors.

The negative sentiment piled on after the Reserve Bank of India and its Monetary Policy Committee indicated 

that they were ready to withdraw policy accommodation. While the rate-setting panel retained its accommodative stance, it tweaked its forward guidance to indicate it would prioritise capping inflation over supporting growth, for the first time in three years.

The RBI also narrowed the liquidity adjustment facility corridor to its pre-COVID level of 50 bps by introducing a standing deposit facility at 3.75%. Central bank officials said the days of providing ultra-accommodation to the market were over, which was seen by traders as a sudden turn in the face of global headwinds, dealers said.

The yield on the 10-year benchmark bond shot up by 20 basis points to hit a 23-month high of 7.12% on Friday.

Traders are seen likely to continue trimming their holdings of benchmark securities in a curtailed trading week as they seek to make room for a mounting supply of gilts and the Centre's record borrowing in 2022-23 (Apr-Mar), dealers said.

The government has offered to sell 40 bln rupees of the 4.56%, 2023 gilt, 70 bln rupees of a new 2029 bond, 130 bln rupees of the 6.54%, 2032 gilt and 90 bln rupees of the 6.95%, 2061 gilt on Wednesday.

Money markets will be closed on Thursday and Friday for Ambedkar Jayanti and Good Friday, respectively.

Today, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.09-7.17%, against 7.12% on Friday.  (Aaryan Khanna)

End

US$1 = 75.95 rupees

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

Edited by Ashish Shirke

Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2022. All rights reserved.