Informist, Monday, Dec 13, 2021

By Aaryan Khanna

NEW DELHI – Government bonds ended broadly steady as traders were cautious ahead of crucial monetary policy meetings in developed countries, which could mark the beginning of a shift away from the ultra-low interest rate regime, dealers said.

Today, the 10-year benchmark 6.10%, 2031 bond ended at 98.08 rupees or 6.37% yield, flat against Friday's close.

Traders eyed the outcome of the Federal Open Market Committee meeting in the US due after market hours on Wednesday, as well as policy outcomes from the European Central Bank, the Bank of England and the Bank of Japan during the week, dealers said.

With price pressures on the rise globally, central banks may withdraw monetary accommodation and move towards hiking key rates as fears of a severe growth downturn due to the newly-discovered and fast-spreading Omicron variant of COVID eased, dealers said.

The US Federal Reserve is seen accelerating the pace of its asset purchase taper at the outcome of its policy review after US CPI inflation in November hit a four-decade high of 6.8% on year, following a reading above 6% in October.

However, global cues remained steady, with the yield on the 10-year US Treasury note remaining below the psychologically-crucial 1.50% mark. Trade volumes were limited in domestic gilts due to a lack of significant cues, dealers said.

"(There were) low volumes in every paper except the 6.10%, 2031 bond today because there really was no change in sentiment over the weekend, it's wait and watch for the global triggers and Fed policy," a dealer at a state-owned bank said.

Investors also avoided stocking up on gilts ahead of the release of the India CPI inflation print for November, dealers said. The government is scheduled to release the data at 1730 IST today.

India's headline retail inflation rate is seen rising to a three-month high of 5.1% in November from 4.48% in October, according to 23 economists polled by Informist.

While the reading was unlikely to have a large impact on gilts, as dealers shared the view it would remain within the Reserve Bank of India's comfort band of 2-6%, an upside surprise due to an unseasonal surge in food prices may be a cause for concern in the coming months, dealers said.

Some traders also limited their exposure to dated securities of longer maturities, especially the 6.67%, 2035 bond, ahead of the release. However, losses in the 10-year benchmark 6.10%, 2031 bond were limited due to two large, early buys of 10 bln rupees each above the bond's previous close, which kept the paper from slipping sharply into the negative, dealers said.

"There was some pressure on long-duration paper due to overseas paying in the five-year overnight indexed swaps, probably on bets about oil jumping further from here," a dealer at a private sector bank said.

"Shorts were covered in the 6.10%, 2031 bond and there was some positive trade early in the day which kept losses in check, otherwise yes, we were also looking at 98-rupee levels today," the dealer said.

The five-year OIS rose 3 basis points to close at 5.38% as the Brent crude oil futures for February traded above the psychologically-crucial $75/bbl mark for the duration of Indian market hours, dealers said.

OUTLOOK

Government bonds may open higher on Tuesday as the CPI inflation print for November was lower than expected.

Headline consumer inflation for November was at 4.91% against an estimate of 5.1%, according to 23 economists polled by Informist.

Traders may cover their short bets that were made ahead of the release, leading gilts to rise, particularly those of longer maturities.

However, some dealers may avoid large bets ahead of the outcome of several key central bank policy meetings this week such as the US Federal Reserve, European Central Bank, the Bank of England and the Bank of Japan.

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 6.33-6.39%.

India Gilts: In thin band; demand muted ahead of CPI, key policies

NEW DELHI--1435 IST--Government bonds were in a narrow band on caution ahead of key policy meetings of central banks this week, and the release of CPI data in India for November today after market hours, dealers said.

The US Federal Reserve is seen accelerating the pace of its asset purchase taper at the outcome of its policy review on Wednesday after US CPI inflation in November hit a four-decade higher of 6.8% on year.

Further, demand was muted ahead of the release of CPI data, with a favourable base effect ending in November, and subsequent readings seen ramping up over 5% in months to come, in line with the Reserve Bank of India's projections last week, dealers said. The central bank estimated CPI inflation in Oct-Dec to average 5.1% and in Jan-Mar at 5.7%.

India's headline retail inflation rate is seen rising to a three-month high of 5.1% in November from 4.48% in October, according to 23 economists polled by Informist.

As is typical, traders avoided stocking up on longer-duration papers awaiting the release. The 6.67%, 2035 gilt fell the most among on-the-run gilts in a day with thin trade.

The 10-year benchmark 6.10%, 2031 bond was supported by two large buys of 10 bln rupees each above Friday's close, which led to a surge in the price early in the day. However, the paper was sharply off-highs in line with its previous close as traders trimmed their holdings at the elevated level, dealers said. 

"Buying sentiment is weak across the curve, I wouldn't read too much into it on a day like this with low volumes," a dealer at a state-owned bank said.

"There's been no momentum in the 6.67%, 2035 paper for a while now, and the 10-year (benchmark) is holding up only because of some aggressive bids in the morning," the dealer said.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.35-6.39%.  (Aaryan Khanna)

India Gilts: Steady on caution before policy meets of key central bks

NEW DELHI--1020 IST--Government bonds were steady today because traders were cautious ahead of the crucial monetary policy meets in developed countries, which could mark the beginning of a shift away from the ultra-low interest rate regime, dealers said.

The US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan are scheduled to hold their policy meetings this week, among others, at a time when the record-high inflation in these countries has prompted authorities to mull hastening monetary policy normalisation, dealers said.

The Fed is expected to accelerate its asset purchase tapering, thereby setting the stage for an earlier-than-expected hike in interest rates, as the CPI inflation in the country hovers around four-decade high, dealers said.

"There are hardly any cues for our domestic market, inflation is expected to climb above 5% but unlikely to pose any risk right now," a dealer with a private bank said. 

"We have to wait and see what the central banks in developed nations do at their policy this week, which could have a knock-on effect but barring a knee-jerk reaction I don't think the impact will be felt beyond a day or two," the dealer added.

Several US central bank officials have recently suggested that the Fed could be open to taper asset purchase at a faster pace to curtail the risk of high inflation on nascent economic recovery.

Meanwhile, the US Fed Chair Jerome Powell in his recent comments suggested that it may be appropriate for the central bank to drop the word transitory while defining the current rise in inflation.

A move to accelerate surplus liquidity absorption from the financial system or a move to hike rates in these countries is likely to have a ripple effect on global bond yields including India, as foreign investors tend to reduce their exposure to riskier emerging market assets such as Indian government bonds, dealers said.

However, the impact on domestic bond yields is likely to be limited as the Reserve Bank of India despite the clamour for a reverse repo rate hike in December, stayed pat on interest rates as it opts to focus on normalising the surplus liquidity condition in the system, dealers said.   

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.35-6.39%.  (Vaibhav Chakraborty)

India Gilts: Seen steady post recent volatility, CPI Nov print eyed

NEW DELHI – Government bonds may open steady today because traders are likely to exercise caution after the recent volatility, expecting the yields to consolidate around the current levels before key monetary policy meets in developed nations.

Bond yields have been moving sharply in either direction as global cues remained volatile due to uncertainty over the near-term interest rate view, even as the Reserve Bank of India maintained a status quo on rates in its monetary policy on Wednesday.

The RBI suggested a benign interest rate environment as it monitors the Omicron variant of coronavirus, while focusing on normalising the surplus liquidity conditions in the banking system before normalising the interest rates.

However, global investors are of the view that the central banks including the US Federal Reserve are likely to accelerate unwinding of the monetary policy stimulus and set ground for interest rate liftoff, as they look to tackle record-high inflation.

Data released on Friday showed that the US CPI inflation for November touched a near four-decade high as it climbed to 6.8% on year, which is likely to push the US Fed to hasten the asset purchase tapering and pave way for interest rate hikes in 2022.     

Market will remain wary ahead of the key central bank policy meetings this week. Apart from the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan are also scheduled to hold their policy meetings this week, among others.

Meanwhile, on domestic front, traders expect the CPI inflation print for November, due for release after the market hours today, is unlikely to impact the bonds significantly as despite an expected rise it is likely to remain below the upper threshold of the RBI's 2-6% comfort range.

India's headline retail inflation rate is seen rising to a three-month high of 5.1% in November from 4.48% in October, according to 23 economists polled by Informist.

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.34-6.39%.  (Vaibhav Chakraborty)

End

US$1 = 75.77 rupees

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

Edited by Michael Correya

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