Informist, Tuesday, Oct 12, 2021

By Aaryan Khanna

NEW DELHI – Government bonds ended higher because investors stepped up purchases after gilts had fallen sharply over the past two days, dealers said. However, the gains were limited due to caution ahead of the release of the CPI inflation print for September, scheduled after market hours.

Overseas cues steadied, with crude oil trading off highs, reducing fears of higher inflation passing through to domestic goods and allowing traders to pick up gilts at attractive yields, dealers said. While the yield on the 10-year US Treasury note rose 12 basis points last week, the Brent crude oil futures contract for December delivery had gained 4% last week and topped the psychologically-crucial $84-per-bbl mark on Monday during Indian market hours.

Today, the contract traded below $84 per bbl and was at $83.83 per barrel at close of market hours. Typically, a fall in crude oil prices leads to lower imported inflation for large consumers like India, giving the Reserve Bank of India more room to prolong its ultra-accommodative policy support.

While the gains were limited, traders took comfort from the fact that the September CPI print is expected to remain firmly within the RBI's comfort band of 2-6%. A poll of 19 economists by Informist estimated that consumer prices rose 4.5% on year in September.

"There was some relief today because US yields and crude are steady and crude came below $84 (per barrel) after trading above it yesterday, most of the 14-year movement is happening on crude prices and (the) inflation view," a dealer at a state-owned bank said.

The 6.67%, 2035 bond was the biggest gainer today as crude prices came off highs. The bond had fallen 82 paise between Thursday and Monday, with some traders covering short bets made before the RBI's policy review on Friday, dealers said.

The price rise in the 2035 bond was amplified by thin trading volumes, dealers said. Gilts maturing in 10  and 14 years may face selling pressure because the RBI did not announce any scheduled bond purchases under the government securities acquisition programme and crude oil prices remained elevated, along with the fact that the Centre's borrowing in Oct-Mar was concentrated in these maturities, dealers said.

Meanwhile, short-term gilts also rose as the RBI policy review on Friday did not provide any negative cues for the bonds, with a large portion of their slump taking cues from the broader fall in the market, dealers said. The central bank had refrained from extending the tenure of its scheduled variable rate reverse repo auctions, while also not hiking the reverse repo rate, as some traders had feared.

Moreover, short-term gilt yields had already priced in the RBI's liquidity normalisation measures and were in a position to rebound from highs. Traders preferred to add gilts maturing in up to 10 years to their portfolios on the view that any further rise in crude oil prices would push longer-term gilts out of favour due to fears of inflation, dealers said.

"If you see it in yield terms, the short-term bonds were the biggest gainers today and I think that will continue till the time the RBI doesn't come out with an open-market (buy) operation or an Operation Twist which focuses on the long-term gilts," a dealer at a foreign bank said.

According to data on the RBI's Negotiated Dealing System – Order Matching Platform, the market-wide turnover was 237.15 bln rupees, against 281.60 bln rupees on Monday.

OUTLOOK

On Wednesday, gilts are seen taking cues from the CPI inflation print for September.

The CPI data is scheduled to be released by the government at 1730 IST today. A poll of 19 economists by Informist pegged consumer inflation at 4.5% in September, well within the RBI's comfort band of 2-6%.

While gilts are expected to remain steady should the print deviate by 10-20 basis points from the median, dealers may trim their holdings if consumer inflation tops 4.75% in September. Conversely, gilts may rise if the print comes in below 4.1%.

The 6.10%, 2031 gilt may remain under pressure ahead of its likely auction on Thursday, especially with the central bank refraining from announcing outright gilt purchases in October. The paper was seen as a candidate by many dealers in the central bank's next round of gilt purchases.

Shorter-tenure gilts may outperform longer maturities as the RBI refrained from announcing a hike in the reverse repo rate and did not extend the duration of its variable rate reverse repo operation.

Any sharp movement in US Treasury yields and crude oil prices overnight may guide domestic bonds early in trade.

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.36% on Wednesday.

India Gilts: In thin band ahead of Sep CPI print; short-term bonds up

NEW DELHI--1410 IST--Government bonds traded on a mixed note, with short-term gilts slightly up as investors took the opportunity to buy at prices considered attractive after the bonds had fallen over the past two days, dealers said.

Short-term bonds rose after the two-day slump as there were no particular negative cues for those bonds at the outcome of the Reserve Bank of India's policy review on Friday, dealers said. The central bank had refrained from extending the tenure of its scheduled variable rate reverse repo auctions, while also not hiking the reverse repo rate, as some traders had feared.

The 5.63%, 2026 bond and the 6.10%, 2035 bond were the most traded papers and were up today as overseas cues, which had led to the papers being sold, were steady. Further, consumer inflation in September was expected to be well within the Reserve Bank of India's comfort band of 2-6%, dealers said.

However, dealers avoided large bets ahead of the CPI inflation print for September, which is scheduled to be released after market hours today. The print is expected to be benign, with an Informist poll of 19 economists estimating that consumer inflation rose 4.5% in September.

"Levels are good to pick up some papers, inflation for September isn't a real risk, but the market is looking at inflation in coming months and preferring shorter-maturity gilts again and will likely cap buys at the 10-year (maturity)," a dealer at a private bank said.

Meanwhile, long-term gilts traded in a thin band amid low volumes due to caution that elevated crude oil prices would pass through to domestic consumer prices in the coming months. Traders avoiding adding those gilts to their portfolios on the view that a rise in inflation would make these gilts unattractive investment prospects in the future, dealers said.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.32-6.37% today. (Aaryan Khanna)

India Gilts: Slightly up on value buying; market awaits Sep CPI print

MUMBAI--1020 IST--Government bonds were slightly up as investors took the opportunity to buy at lower prices after bonds had slumped over the past two days, dealers said. However, dealers avoided large bets ahead of the CPI inflation print for September, which will be released after market hours today.

An Informist poll of 19 economists expects CPI inflation for September falling to 4.5% in September from 5.30% in August. 

Dealers would be keenly watching the print to see if the recent rise in commodity prices had an impact. A higher-than-expected print could thus lead to a sell-off in bonds as it would change the view on near-term inflation outlook, dealers said.

Bonds had plunged on Friday after Reserve Bank of India Governor Shaktikanta Das announced discontinuation of the government securities acquisition programme, which the RBI had started in April in a bid to anchor yields.

Moreover, the 10-year US Treasury yield rose more than 10 basis points last week. This had prompted foreign investors, who had bought over 76.36 bln rupees of gilts cumulatively under the general limit and the fully accessible route, to sell domestic bonds. Crude oil prices, too, soared over the past two weeks sparking fears of high inflation in the near term.

"The yield on the 10-year paper is crucial right now, and I believe if it goes beyond 6.35%, stop losses will get triggered," said a dealer with a private bank.

"Having said that, the yield has hardened quite a bit over the last week or so, and I guess some are just taking advantage to buy the gilt at a lower price."

The yield on the 10-year benchmark 6.10%, 2031 paper had risen 7 basis points since Friday.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.37% today. (Nikhil Patwardhan)

India Gilts: Seen steady on caution ahead of Sep CPI inflation data

MUMBAI – Government bonds are seen steady today because dealers may avoid large bets on caution ahead of the release of CPI inflation data for September. The data will be released after market hours today. 

An Informist poll of 19 economists expects CPI inflation for September dropping to 4.5% in September from 5.30% in August.

The inflation data for September attains significance as it comes at a time when global commodity prices have been on the rise led by a surge in crude oil prices. The primary reason behind the sharp rise in commodity prices has been worries of supply-demand mismatch with more economies opening up from COVID-induced lockdown restrictions.

Investors, thus are keenly waiting to see whether the recent surge in commodity prices impacts the inflation print for September, dealers said.

Meanwhile, the Reserve Bank of India last week at its monetary policy review meeting had slashed inflation estimates for 2021-22 (Apr-Mar) by 40 basis points to 5.3%, erasing much of the upward revision it had announced in August. Even the government in its latest monthly economic review said that CPI inflation is expected to sustain its downward trajectory in the coming months, but warned that global crude oil price volatility would pose concern.

If the CPI inflation print for September reflects the recent rise in crude oil and commodity prices and comes above expectations, the view on the timeline of policy normalisation would change again, dealers said. Following comments from top RBI officials at the presser last week, many dealers had started believing that the RBI would go slow on tightening its ultra-loose policy accommodation. But if inflation stays sticky due to elevated commodity prices, dealers expect the central bank to take steps accordingly, thus changing the view on normalisation.

Dealers would also avoid aggressive bets due to the recent volatility. The yield on the 10-year benchmark 6.10%, 2031 bond has hardened 7 basis points over the last two sessions.

Surge in US yields and crude oil prices along with the RBI's discontinuation of outright gilt purchases under the government securities acquisition programme led to yields hardening, dealers said. Many dealers had expected the RBI to taper down the quantum of its gilt purchases, but very few had anticipated total discontinuation of the gilt-purchase programme. Dealers had expected the RBI to buy the 6.10%, 2031 and the 6.67%, 2035 papers in the next round of gilt purchases.

Moreover, the Centre has offered to raise 130 bln rupees in the 6.10%, 2031 gilt on Thursday and to make room for the fresh supply of the paper, dealers may further trim holdings of the paper.

Dealers thus expect the yield on the 10-year paper to stay elevated until the RBI announces open market operations and includes the gilt in a bid to anchor yield on the paper. 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.37% on today. (Nikhil Patwardhan)

End

US$1 = 75.51 rupees

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

Edited by Avishek Dutta

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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