Informist, Wednesday, Nov 29, 2023

By M.C. Adhiinthran and Aaryan Khanna

MUMBAI/NEW DELHI – Prices of government bonds ended higher, tracking the overnight fall in US yields on speculation that the US Federal Reserve may pivot to rate cuts sooner than expected, dealers said. However, the gains were limited as traders trimmed their bond holdings due to caution ahead of key data releases in the US and India.

The 10-year benchmark 7.18%, 2033 bond closed at 99.50 rupees, or 7.25% yield, against 99.32 rupees, or 7.28% yield, on Tuesday.

If inflation continues to fall "for several more months...three months, four months, five months...we could start lowering the policy rate just because inflation is lower," US Federal Reserve Governor Christopher Waller said on Tuesday.

The yield on the benchmark 10-year US Treasury note fell to 4.29% at the end of Indian market hours today from 4.41% on Tuesday.

According to CME Group's FedWatch tool, the first sign of a rate cut is in March, with 40.4% Fed Fund futures traders expecting a rate cut then, doubling from the previous day. Nearly half of the traders expect at least a 25-bps reduction in the policy rate by May 1. Currently, the key interest rate in the US is at 5.25-5.50%.

While bond prices jumped early in the day, the momentum didn't sustain ahead of the data releases and lack of firm domestic cues, dealers said. Thay added that some of the selling momentum was on account of the tight liquidity in the banking system, which had also resulted in poor demand for fresh supply at the auctions for gilts on Friday and state bonds on Tuesday.

At the end of trade on Tuesday, liquidity in the banking system was in a deficit of 1.10 trln rupees, and has largely been in a deficit since mid-September.

Dealers speculated that private and foreign banks were on the buying side, taking cues from offshore cues. Foreign banks were net buyers on Tuesday as well. Other sections of the market trimmed their portfolios at a profit.

"It's not just state-owned banks, but almost all participants are clearing up ahead of the big data," a dealer at a state-owned bank said. "Positions will be taken again post data releases."

The second estimate of US GDP data for Jul-Sep is scheduled after market hours today, while the Indian GDP print for the September quarter is scheduled at 1730 IST on Thursday. The US personal consumption expenditure data for October is also scheduled for Thursday. 

US GDP likely grew 4.3% on year in the September quarter, according to a poll by Reuters. The first estimate showed an increase of 4.9% on year. 

According to a poll of 21 economists by Informist, India's GDP growth may ease to 6.8% in the September quarter from a four-quarter high of 7.8% in Apr-Jun.

The two figures are likely to be robust and unlikely to signal that either economy requires rate cuts to boost growth momentum, which dampened some enthusiasm for buying gilts, dealers said. 

Traders were also wary of stocking up on the 10-year gilt as its yield fell below 7.25% during the day, as a majority of the market was of the view that prices would not rise much further from current levels, dealers said.

Separately, the Union Cabinet late on Tuesday approved the extension of the Pradhan Mantri Garib Kalyan Yojana, under which the government will provide 5 kg of wheat or rice and 1 kg of pulses per month to the poor for free for the next five years. The extension of the scheme is set to cost around 11.80 trln rupees over five years. The free food grain scheme, first launched during the COVID-19 pandemic, was to end in December.

Traders took note of the announcement, but bond prices did not react much as the outlook for gilts in the medium term remains positive, with India's inclusion in JP Morgan's emerging bond market index suite likely to draw up to $25 bln in government debt purchases. Moreover, the fiscal impact of the additional outlay in Jan-Mar is not likely to be material, dealers said.

"As of now, there is no fear of fiscal slippage being priced into the market," a dealer at a primary dealership said. "The government was expected, and they seem to have enough buffers built up on the revenue front to give out some of these sops before elections."

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the turnover was 402.25 bln rupees, compared with 230.95 bln rupees on Tuesday. There were two trades worth 100 mln rupees using the wholesale digital rupee pilot today, the same as the previous day.

OUTLOOK

On Thursday, gilt prices are seen taking cues from the reaction in US Treasury yields after the second estimate for US GDP data for Jul-Sep is released after market hours on Wednesday, dealers said.

US GDP likely grew by 4.3% on year in the September quarter, according to a poll by Reuters. The first estimate showed an increase of 4.9% on year. 

Inflation data for the US will also be closely watched on Thursday, as will India's GDP print for Jul-Sep at 1730 IST on Thursday.

India's GDP growth is likely to have eased to 6.8% in the September quarter from a four-quarter high of 7.8% in Apr-Jun, as the statistical effect of a low base normalises, according to a poll of 21 economists by Informist.

The market is also waiting for Bloomberg's decision on the inclusion of India's sovereign bonds in its widely-tracked debt indices, though hopes of inclusion have fizzled out.

A sharp move in crude oil prices may also lend cues at the opening. 

The yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.21-7.28%.

India Gilts: Up; traders sell bond holdings at profit, cap gains

MUMBAI--1533 IST--Prices of government bonds rose, tracking a fall in US Treasury yields, dealers said. However, the rise was limited as traders avoided placing aggressive bets due to lack of prominent domestic cues. 

"People are not taking positions at this level because they want triggers. Sure, a fall in US Treasury yield is there, but in the coming days we have our MPC (Monetary Policy Committee meeting), and then the FOMC (Federal Open Market Committee) meeting is also there," a dealer at a state-owned bank said. 

There was caution in the market ahead of the Reserve Bank of India's MPC meeting, scheduled for Dec 6-8. Meanwhile, the Federal Open Market Committee meeting is scheduled to take place on Dec 12-13, dealers said. 

Also, the market feared that India may not be included in the Bloomberg index this time, which limited the movement in bonds, dealers said. The market had earlier expected the outcome of the advisory councils meeting for index inclusion by the end of November.

Dealers speculated that state-owned banks and primary dealerships sold their holdings at a profit, weighing on the bonds. They also speculate that private and foreign banks were on the buying side. Foreign banks were net buyers on Tuesday as well. 

Separately, at the auction of Treasury bills today, the cut-off on the 182-and 364-day T-bill was inverted for the first time since Jun 21. The RBI set the cut-off for the 182-day paper at 7.16%, and the cut-off for the 364-day one at 7.15%. 

Dealers said the deficit in the banking system liquidity and overnight rates weighed on short-term debt instruments. At the end of trade on Tuesday, the deficit was 1.10 trln rupees. Meanwhile, the overnight Mumbai Interbank Offer Rate was set at 6.90% today.

A fall of 12 basis points in the yield on the benchmark 10-year US Treasury note aided gilts. The yield fell to 4.29% from 4.41% at the close of the Indian market on Tuesday. US yields fell as comments by US Federal Reserve Governor Christopher Waller implied that policy rate cuts were on the horizon. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 338.90 bln rupees, compared with 146.90 bln rupees at 1530 IST on Tuesday. 

For the rest of the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.22-7.28%. (Siddhi Chauhan)

India Gilts: Remain up tracking overnight fall in US yields

MUMBAI--1225 IST--Prices of government bonds remained up following an overnight fall in the yield on the 10-year US Treasury note, dealers said. However, the gains were limited as state-owned banks sold bonds at a profit. 

Dealers said state-owned banks would prefer to buy government bonds at levels of around 7.25-7.30% on the 10-year benchmark, 7.18%, 2033. Nowadays, state-owned banks are buying at the auction, and selling in the secondary market. 

In addition to state-owned banks, primary dealerships also sold government securities at a profit, capping the initial gains in gilts, dealers said. Private and foreign banks were speculated to be on the buying side.

Volume remained concentrated in long-term bonds. Among on-the-run papers, short-term papers remained out of favour as liquidity in the banking system remained in deficit, dealers said. 

At the end of trade on Tuesday, liquidity in the banking system was in a deficit of 1.10 trln rupees, according to RBI data.

"As system liquidity has been in deficit for a long time, people are booking profit at whatever level they are getting because they will get cash in hand," a dealer at a state-owned bank said. "Capex growth is slow, pushing liquidity further into deficit. Therefore, our yield on the 10-year(7.18%, 2033) has not softened much in comparison to US yields." 

On the global front, the yield on the benchmark 10-year US Treasury note fell to 4.27% from 4.41% at the close of the Indian market on Tuesday. US yields fell as comments by US Federal Reserve Governor Christopher Waller suggested that policy rate cuts were on the horizon. The benchmark 10-year paper hit a two-month low, while the more rate-sensitive two-year benchmark paper fell by 11 basis points to 4.73%.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 226.50 bln rupees, compared with 69.85 bln rupees at 1230 IST on Tuesday. 

During the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.22-7.28%. (Anupreksha Jain)

India Gilts: Up; US ylds fall as Fed official hints rate cut Jan-Jun

MUMBAI--0940 IST--Prices of government bonds rose as US Treasury yields fell overnight, dealers said. Some traders also covered their short bets on fears of a further fall in US Treasury yields, aiding gilt prices.

"The rally is not what it should have been, given US yields fell almost 10-11 basis points," a dealer at a private bank said. "Things have turned slightly negative after the state loan and gilts auction, which show some supply concerns."

On Tuesday, demand at the state bond auction was not as robust as expected and led to higher-than-expected cut-off yields, dealers said. A total of 17 states had raised 358 bln rupees through bond sales, against the 295 bln rupees notified in the indicative calendar for Oct-Dec borrowing. This was the largest auction of state bonds this year. On Friday, dealers had speculated that the demand for gilts was also affected by the large size of the state loan auction.

The yield on the benchmark 10-year US Treasury note fell to 4.30% in early trade today, as against 4.41% at the closing hours of the Indian market on Tuesday. 

US Treasury yields fell as comments from Fed Governor Christopher Waller suggested that policy rate cuts are on the horizon. The benchmark 10-year paper hit a two-month low, while the more rate-sensitive two-year benchmark paper fell by 11 basis points to 4.73%.  

According to the CME Group's FedWatch tool, around 39% of traders now expect the first rate-cut of 25 basis points in the world's largest economy by March, as against around 25% of traders in the previous week. Meanwhile, 50% of traders expect a rate cut in May, higher from around 43% earlier. Currently, the key interest rate in the US is at 5.25-5.50%.

Volume remained concentrated in the long-term bonds, as traders refrained from placing large bets at the short end of the curve due to the prevailing liquidity deficit in the banking system. At the end of trade on Tuesday, the deficit was 1.10 trln rupees.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 51.96 bln rupees, compared with 25.95 bln rupees at 0930 IST on Tuesday. 

During the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.22-7.28%.  (Nishat Anjum)

India Gilts: Seen sharply up tracking overnight fall in US ylds

MUMBAI – Prices of government bonds are seen opening sharply higher tracking an overnight slump in US Treasury yields as investors assessed comments from US Federal Reserve Governor Christopher Waller, who suggested that policy rate cuts are on the horizon, dealers said.

If inflation continues to fall "for several more months...three months, four months, five months...we could start lowering the policy rate just because inflation is lower," Waller said on Tuesday.

The yield on the benchmark 10-year US Treasury note fell to 4.29% in Asian trade today, as against 4.41% at the closing hours of the Indian market on Tuesday. A fall in US Treasury yields widens the interest rate differential between the safe-haven asset and emerging market debt, making the latter more appealing to foreign investors.

According to CME Group's FedWatch tool, the first sign of a rate cut is in March, with 40.4% Fed Fund futures traders expecting a rate cut then, doubling from the previous day. Nearly half of the traders expect at least a 25-bps reduction in the policy rate by May 1. Currently, the key interest rate in the US is at 5.25-5.50%.

During the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.20-7.27%, as against 7.28% on Tuesday. Dealers said that the benchmark yield would fall below 7.25%, followed by heavy selling if the yield levels fall to 7.20-7.22% levels. State-owned banks may lead the selloff at those levels as they take profits, dealers said. 

Meanwhile, a rise in crude oil prices limit the gains, dealers said. Crude oil futures rose as investors awaited the outcome of the Organization of the Petroleum Exporting Countries and allies' meeting scheduled on Thursday. Market participants expect supply cuts to deepen in 2024.

Brent crude oil for January delivery rose to $81.75 a barrel in Asian trade today, from $80.74 per bbl on Tuesday. An uptick in crude oil increases India's import bill and leads to inflationary pressures. (M.C. Adhiinthran)

End

US$1 = 83.33 rupees

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

Edited by Avishek Dutta

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