Informist, Friday, Mar 11, 2022

By Aaryan Khanna

NEW DELHI – Government bonds reversed early gains and ended sharply down as prices of crude oil recovered from its intraday low on heightened geopolitical tensions, and as overnight indexed swap rates spiked, said dealers.

The 10-year benchmark 6.54%, 2032 bond settled at 97.76 rupees or 6.86% yield, against 98.08 rupees or 6.81% on Thursday.

Gilts opened higher as crude oil prices fell overnight after Russian President Vladimir Putin on Thursday said the country would continue to meet its contractual obligations on energy supplies. Moreover, the US reportedly made moves to ease sanctions on Venezuelan oil and efforts to seal a nuclear deal with Tehran could lead to increased oil supply.

However, traders were left disappointed with the lack of progress towards a diplomatic solution between Russia and Ukraine, and trimmed holdings as crude oil surged on reports that Russian forces had initiated a fresh round of attacks on key Ukrainian cities today.

Brent crude oil futures for May delivery closed at $111.81 a barrel at the end of Indian market hours today, 4.4% higher than the day's low hit earlier. 

"Brent had fallen to $107 a bbl, but we're looking at it staying above $110 per bbl now until this war between Ukraine and Russia comes to a close, there was another attack today and the market is going to stay light until there is a resolution in the tensions, till we have some assurance on what is happening," a dealer at a primary dealership said.

Moreover, traders avoided stepping up purchases after yields came down on Thursday despite energy prices remaining lower than recent highs on concerns that the Reserve Bank of India may raise its projections for consumer inflation at the upcoming policy review in April.

The central bank's estimate of Consumer Price Index-based inflation of 4.5% for 2022-23 (Apr-Mar) is significantly lower than the majority of analysts and any upward revision could be a precursor to hiking rates amid the uncertain global environment and central banks around the world tightening monetary policy due to heightened price pressures, dealers said.

Consumer inflation in the US surged to 7.9% in February on an annual basis, data from the US Labor Department showed on Thursday. This is its largest increase in 40 years and well above the US Federal Reserve's target of 2%, putting the US Federal Open Market Committee on course to hike its benchmark rate by at least 25 basis points at its policy review next week.

Meanwhile, long-term gilts fell further tracking a surge in the five-year overnight indexed swap rate towards the latter half of the day, as offshore clients paid fixed rates noting higher global yields after the European Central Bank's policy outcome indicated it may raise rates later this year.

Investors stepped up purchases in the 10-year benchmark 6.54%, 2032 bond as its yield topped the psychologically crucial 6.85% mark, but market sentiment remained negative and led to further selling on caution ahead of the weekend, dealers said.

"OIS flows came in pretty strong and therefore the trimming in gilts had to be done to compensate, we are only trading right now on global spillovers which are keeping yields here, otherwise on the domestic front there has been no data or commentary that indicates sharp rate hikes yet," a dealer at a private bank said.

According to data on the Reserve Bank of India's Negotiated Dealing System – Order Matching platform, the market-wide turnover was 149.45 bln rupees, as against 245.40 bln rupees on Thursday.

OUTLOOK

Government bonds are seen opening steady on Monday ahead of the release of Consumer Price Index-based data for February after market hours.

Consumer inflation in February is expected to have moderated to 5.9% from a seven-month high of 6.01% in January, according to the median of estimates of 19 economists polled by Informist.

Traders may keep to the sidelines on caution ahead of the US Federal Reserve's policy review outcome on Thursday, with the world's largest central bank likely to start increasing rates to curb inflation.

Meanwhile, the Reserve Bank of India Deputy Governor Michael Patra's comments at an industry event indicated that policymakers were wary of inflationary spillovers into the domestic market, which may weigh on bond prices, dealers said.

Traders will also focus on new developments in the ongoing invasion of Ukraine by Russia for triggers. Reports indicated that the outcome of the meeting between Russia and Ukraine's foreign ministers today was inconclusive and may not hasten the end of the war.

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

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.82-6.89%.

India Gilts: Down; reverse early gains as Brent crude oil off lows

NEW DELHI--1350 IST--Government bonds reversed early gains and fell tracking a recovery in crude oil prices, even as volumes remained muted due to a lack of significant cues, dealers said.

Brent crude oil futures for May delivery topped $112 a barrel today, up over 4.5% from the day's low.

With crude oil prices failing to sustain under the psychologically-crucial $110-a-bbl mark, traders trimmed their gilt holdings anticipating that imported inflation would rise sharply above the Reserve Bank of India's expectations in the near term, dealers said.

Traders were wary that the central bank may have make an upward revision to its forecast for consumer inflation in 2022-23 (Apr-Mar), at its April policy review meet, from 4.5% estimate earlier. The RBI's figure was significantly lower than the majority of market participants, dealers said.

Moreover, from policymakers' comments, any such increase may lead to the Monetary Policy Committee hiking the repo rate, potentially as early as June, dealers said.

"Bond prices are being swept up in whichever way the crude goes, we have seen some shorts come in again now above $110-per-bbl, which has come up sharply since the morning trade," a dealer at a private bank said.

"Inflation forecasts will have to be raised, it doesn't look like the oil market is going to be kind to importers this year at all," the dealer said.

Market sentiment was also weak over uncertainties caused by the conflict between Russia and Ukraine, as a diplomatic solution failed to materialise on Thursday, after a meeting of their foreign ministers.

Moreover, the US CPI inflation reading for February at 7.9%, a fresh 40-year high, was seen putting pressure on the US Federal Reserve to raise rates at its policy review next week, and set the tone for quicker rate hikes in subsequent months, dealers said.

India Gilts: Up as crude falls, geopolitical uncertainty caps gains

NEW DELHI--1055 IST--Government bonds rose tracking an overnight fall in crude oil prices but gains were limited due to the uncertainty surrounding geopolitical issues, dealers said.

Crude oil prices fell overnight after Russian President Vladimir Putin said that Russia would continue to meet its contractual obligations on energy supplies. Russia supplies a third of Europe's gas and is one of the biggest oil exporters in the world.

Meanwhile, talks between foreign ministers of Russia and Ukraine on Thursday remained inconclusive, dealers said, adding that no agreement over ceasefire capped the gains.

Traders were also wary of placing large bets ahead of CPI data release on Monday. According to the median of 19 economists in Informist poll, inflation in February is expected to have moderated to 5.9% from a seven-month high of 6.01% in January.

"Right now the sentiment is of sell-on-rise. Crude will stay above $100 per bbl and borrowing calendar will come in the last week of March so there aren't a lot of positive cues. Usually valuation buying comes in close to end of financial year but we'll have to see if this is the case this year as well," a dealer at state-owned bank said.

Today, yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.76-6.82%. (Shubham Rana)

India Gilts: May open higher as fall in crude eases inflation worries

NEW DELHI – Government bonds may open higher today because domestic inflation worries are seen easing after crude oil prices fell overnight on reports Russia pledged to fulfil contractual obligations on energy supplies, dealers said.

On Thursday, Russian President Vladimir Putin said that the country, supplies a third of Europe's gas and 7% of global oil, would continue to meet its contractual obligations on energy supplies.

Moreover, the US reportedly made moves to ease sanctions on Venezuelan oil and efforts to seal a nuclear deal with Tehran could lead to increased oil supply.

Brent crude oil futures for May delivery ended at $109.33 per barrel on Thursday, down nearly $8 per bbl from the close of Indian trading hours. 

Meanwhile, inflation in the US surged to 7.9% in February on an annual basis, data from the US Labor Department showed Thursday. This is its largest increase in 40 years and well above Fed's target of 2%.

However, the domestic market may not react to the rise in US inflation, with Federal Reserve already expected to hike interest rates on Mar 16, dealers said. 

Traders may also stock up on gilts because of a lack of fresh supply in March, after the government ended its borrowing programme for 2021-22 in February. 

Gains may be limited with traders wary of placing large bets because of uncertainty around the Russia-Ukraine war. 

Today, yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.74-6.83%. (Shubham Rana)

End

US$1 = 76.37 rupees

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

Edited by Deepshikha Bhardwaj

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.

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