Informist, Monday, Jan 10, 2022

By Shubham Rana

NEW DELHI- Government bonds fell sharply today, weighed down by rise in US Treasury yields and data showing pickup in the Reserve Bank of India's bond sales in the secondary market, dealers said.

The 10-year benchmark 6.10%, 2031 bond ended at 96.58 rupees or 6.59% yield, against 96.91 rupees or 6.54% on Friday.

US yields topped pre-pandemic levels on Friday as investors priced in the prospect of faster-than-expected policy tightening by the US Federal Reserve, with some analysts predicting rate hikes as early as March.

Last week, minutes of the Federal Open Market Committee's December meeting showed that policymakers see around three interest rate hikes this calendar year while also looking to trim the Fed's asset holdings to fight off the multi-decade high inflation in the US.

Yield on the 10-year US Treasury note rose 3 basis points to 1.76% on Friday, climbing for five straight days last week, and recording the biggest weekly rise since September 2019. A rise in US Treasury yields narrows the interest rate differential between the haven asset and emerging market debt, making the latter less appealing for foreign investors.

Meanwhile, data released on Friday showed the RBI sold bonds worth 45.20 bln rupees in the week ended Dec 31. With this, the central bank has cumulatively sold 153.75 bln rupees worth of bonds in eight successive weeks, although the latest reported weekly sale was more than twice the size of the average for the prior seven weeks.

Investors were disappointed that the RBI has stepped up its liquidity sterilisation operations while not announcing any measures so far to cap rising bond yields. If anything, the fact that the RBI has stepped up its bond sales despite thin trade volumes indicates the central bank's tacit approval for the rise in yields. This also prompted traders to place short bets on the view that gilt prices would continue to fall unless the RBI indicates its discomfort with higher yields, dealers said.

Meanwhile, banks that had bid aggressively for the 6.67%, 2035 bond at the weekly gilt auction on Friday saw stop losses being triggered on the recently acquired stock, dealers said.

In later part of the day, gilts across maturities recovered slightly as some traders covered their short bets close to the day's lows. Further, state-owned banks initiated fresh purchases of longer maturity gilts amid muted volumes as yields were perceived to be at attractive levels, dealers said.

Gilts took a beating also because the RBI devolved 43.88 bln rupees of the 5.73%, 2026 bond on underwriters on Friday, which led to selling pressure in the short-term gilts today.

"It's known that the borrowing numbers will be large in the upcoming budget and this time RBI's G-SAP (government security acquisition plan) is also missing to support the market," said a dealer with a state-owned bank.

The 6.10%, 2031 bond lost favour due to widespread market expectations that the government will announce the issuance of a new 10-year gilt today, which would strip the 2031 bond of its benchmark status.

"There will be demand for a new benchmark paper, but I don't think people will go after it aggressively because the overall sentiment remains negative," the dealer said. "It will probably be 5 basis points below the current level."

Informist today exclusively reported quoting banking sources that the RBI has been engaging with the market on the recent rise in yields while the market has asked the central bank to mull an Operation Twist to provide a signal on the yields.

According to dealers, no level is considered sacrosanct any more now that the 10-year benchmark yield has topped the psychologically crucial 6.55-56% level.

"That story is dead now. People said 6.50% earlier, now some are saying 6.75%, people are just increasing the bar with the rise in yields but everyone is drowning right now," said another dealer with a state-owned bank.

According to data on the RBI's Negotiated Dealing System – Order Matching platform, the market-wide turnover was 176.65 bln rupees, against 197.85 bln rupees on Friday.

OUTLOOK

Bond prices are seen up on Tuesday as the government is set to issue a new 10-year bond this week. After market hours today, the RBI notified that the government will offer 240 bln rupees worth of three dated securities, including a new 10-year paper for sale this week. 

A new 10-year bond is typically priced aggressively, and since it serves as a benchmark for other papers, its issuance causes a downward shift in the yield curve. 

The 6.10%, 2031 bond may lag as the paper is seen losing its benchmark status soon.

Any sharp movement in US Treasury yields and crude oil prices might also lend cues at open.

On Tuesday, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.55-6.60%.

India Gilts: Fall tracking rise in US yields; bond sales by RBI weigh

NEW DELHI--1225 IST--Government bonds fell today taking cues from an uptick in US Treasury yields, while an increase in the pace of the Reserve Bank of India's bond sales in the market further weighed on sentiment, dealers said. 

Yields on US Treasury bonds ended at a near two-year high on Friday as investors trimmed their bond holdings on expectations of an early rate hike by the US Federal Reserve, dealers said.

Yield on the 10-year US Treasury bond ended at 1.76% on Friday, against 1.73% on Thursday as investors continued to factor in the prospect of faster-than-expected policy tightening by the Federal Reserve. US yields climbed for five straight days last week, recording the biggest weekly rise since September 2019.

Last week, minutes of the December meeting of the Federal Open Market Committee revealed that policymakers see around three interest rate hikes this calendar year while also looking to trim the Federal Reserve's asset holdings to fight off the multi-decade high inflation in the US.

Back home, data released on Friday showed the RBI sold bonds worth 45.20 bln rupees in the week ended Dec 31. With this, the central bank has cumulatively sold 153.75 bln rupees worth of bonds in eight successive weeks, although the latest reported weekly sale is more than twice the size of the average for the prior eight weeks.

Moreover, the appetite for dated securities remains weak after the Reserve Bank of India devolved large sums of bonds at the weekly gilt auction on Friday, dealers said.

The RBI devolved 43.88 bln rupees of the 5.74%, 2026 paper on underwriters on Friday, which prompted primary dealers to offload the devolved stock in the secondary market. The worst hit paper today was the 6.67%, 2035 bond, which was also auctioned on Friday. Some traders said that the fall in prices triggered stop losses on the 2035 stock acquired at the auction last week.

"Recent devolvements (at the weekly auctions) and the continuous rise in US yields are the main reasons behind the market sentiment right now. The market needs a positive piece of news to go up," said a dealer with a state-owned bank. "I feel there is a bit of an overreaction by the market, so it should stay at around current levels."

Meanwhile, traders await the details of the bonds to be offered for sale at the weekly auction this Friday for further cues.

Today, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.54-6.57%.  (Shubham Rana)

India Gilts: Seen steady lacking cues; details of debt sale Fri eyed

NEW DELHI – Government bonds may open steady as traders may keep to the sidelines citing a lack of significant domestic cues, awaiting details of bonds to be offered at the weekly gilt auction this Friday, expected after market hours today.

The Centre is expected to announce a new 10-year paper to be issued this week due to the high outstanding of the 10-year benchmark 6.10%, 2031 gilt, dealers said. 

Typically, the old benchmark paper falls when a new paper is issued due to concerns of impending illiquidity, but traders may add the 2031 paper to their portfolios at prices considered attractive anticipating the lack of further supply of the paper, dealers said.

The Centre refrained from issuing more than 1.5 trln rupees in a single security in the current financial year so far. The 6.10%, 2031 bond has an outstanding of 1.48 trln rupees, with the RBI rejecting all bids for the paper at the auction on Dec 31 that would have pushed the gilt's outstanding over the mark.

Appetite for demand securities is likely to remain weak, with dealers unlikely to stock up on gilts after the devolvement of a large quantum of bonds at the weekly gilt auction on Friday, dealers said.

The RBI devolved 43.88 bln rupees of the 5.74%, 2026 paper on underwriters on Friday, which could lead to selling pressure in short-term gilts, as primary dealers make room for the paper in their trading books, dealers said.

Meanwhile, traders said that the gilts being offloaded by the RBI outside open market operations suggested that the central bank is no mood to come up with measures to cap the yield at a time when it is looking to tighten financial conditions by absorbing a large quantum of surplus liquidity from the system.

According to the Weekly Statistical Supplement data, the RBI sold gilts worth 45.20 bln rupees outside scheduled operations in the week ending Dec 31. The central bank has net sold gilts worth 153.75 bln rupees outside its open market operations since the fag-end of November. 

Today, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.52-6.57%.  (Aaryan Khanna)

End

US$1 = 74.04 rupees

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

Edited by Ashish Shirke

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