Informist, Monday, Sep 18, 2023
By Aaryan Khanna
NEW DELHI – Prices of government bonds ended slightly higher on a seesaw day, representative of the past week, as hopes lingered on India’s gilts being included on global indices for emerging market debt, but traders were cautious ahead of the US Federal Open Market Committee’s rate decision on Wednesday, dealers said.
A lack of conviction on the listing and lacklustre market appetite in the face of adverse global cues prompted gilts to give up most gains by the end of the day, dealers said.
The 10-year benchmark 7.26%, 2033 bond closed at 100.45 rupees, or 7.19% yield, against 100.40 rupees, or 7.20% yield, on Friday. The 7.18%, 2033 bond closed at 100.13 rupees, or 7.16% yield, against 100.10 rupees, or 7.16%, the previous trading day.
Government bond prices have been pushed up periodically by reports in the last two weeks that have suggested the listing of India’s sovereign gilts on global indices may be imminent, with major bond index providers such as FTSE Russell and JPMorgan, the two most likely candidates, conducting their half-yearly reviews for index composition this month, dealers said.
Foreign investors are expected to push for the inclusion of Indian gilts in a move to diversify away from other emerging market debt such as China’s, while Russia has been excluded from most global indices in the aftermath of its invasion of Ukraine. Despite operational roadblocks to the move and the government’s seeming reluctance to smoothen the process, some traders are optimistic indices may find India’s bonds too compelling an opportunity to pass up, dealers said.
This led to prices surging on Thursday, followed by a disappointing auction on Friday which showed that investors are not keen to stock up on gilts at significantly lower returns, dealers said. Following another report speculating bond index inclusion may be close today, the price of the 10-year bond surged to a high of 100.63 rupees.
Dealers have been wary of placing large bets on such reports, which have driven up gilt prices to disappointing results from index providers over the last two years.
Consequently, some traders took the opportunity to book profits on stock picked up on Friday, while others trimmed their intraday bets before the close, dealers said.
“People have been burnt, and everybody is looking at the exit door the moment they are not losing money,” a dealer at a private bank said. “In a volatile market, the sentiment is really not very strong on a big rally even if index inclusion is announced.”
Gilts had opened lower after a poorly bid auction from state-owned banks on Friday which resulted in sharply lower-than-expected auction cutoff prices, dealers speculated. Traders do not want to hold on the heavy portfolios ahead of a holiday and the event risk of the US policy review, dealers said.
Traders refrained from placing bets in short-term bonds as the banking system liquidity went into a deficit, dealers said. At the end of trade on Friday, liquidity in the system was estimated to be in a deficit of 457 bln rupees, against a surplus of 26.96 bln rupees on Thursday. Even at the day’s high, short-term bonds were out of favour and lagged the gains in longer-tenure gilts amid lack of clarity on the interest rate trajectory in the US and India.
Indian money markets are shut on Tuesday for Ganesh Chaturthi. Simultaneously, the US Federal Reserve’s rate-setting panel will start debating interest rates at its two-day meeting.
The FOMC is expected to stand pat on rates, but US Fed Chair Jerome Powell’s comments after the policy will be closely eyed on whether the world’s largest economy has finally seen its last rate hike in the current cycle, dealers said.
According to CME’s FedWatch tool, a sustained pause to hold the Fed funds target rate at 5.25%-5.00% is a near-unanimous view, in the upcoming FOMC policy review outcome on Wednesday. Meanwhile, 68.5% of traders expect the same at the conclusion of its November meeting, while around 30% expect a rate hike of 25 basis points.
With crude oil prices and US Treasury yields also inching up, traders preferred caution on fundamental triggers instead of the bond index hopes, dealers said.
Crude oil prices rose on supply tightness and optimism that the Chinese economy is gaining strength, while mixed data kept the yield on the benchmark 10-year US Treasury note remained above the crucial 4.30%-mark, which weighed on domestic bonds, dealers said.
Brent crude for November delivery traded about the $94-a-bbl mark through the day, well above the Reserve Bank of India’s baseline assumption for $85-a-bbl for the Indian crude basket for its 2023-24 (Apr-Mar) inflation projections.
“Fundamentally, we should be closer to 7.25% (on the 10-year gilt yield) rather than sub-7.20%,” a dealer at a state-owned bank said. “So that shows they (traders) will always try to limit his losses here, because the downside risk is very high if you miss a call.”
According to data on the RBI’s Negotiated Dealing System-Order Matching platform, the turnover today was 460.60 bln rupees, compared with 490.85 bln rupees on Friday. There were no trades today with the digital rupee pilot compared with two trades worth 200 mln rupees on Friday.
OUTLOOK
Indian money markets are shut on Tuesday for Ganesh Chaturthi.
Government bonds are seen opening steady on Wednesday as traders avoid aggressive bets ahead of the US FOMC rate decision after market hours, dealers said.
The US Fed’s panel is expected to maintain status quo on the Fed funds rate at 5.25-5.50%, but comments from policymakers on the further course of monetary policy actions will be keenly watched, dealers said.
News of India’s inclusion into bond indices may spur further purchases and move the 10-year benchmark yield below the key 7.15%-mark, which is likely to draw sales from state-owned banks.
A sharp move in US Treasury yields and crude oil prices could also be a trigger for gilt prices at open.
The yield on the 10-year benchmark 7.26%, 2033 bond is seen in a range of 7.11-7.22%.
India Gilts: Reverse losses, rise on MF buys, hope of index inclusion
NEW DELHI–1525 IST–Government bond prices reversed early losses and rose sharply as mutual funds stocked up on gilts at prices considered lucrative, dealers said. Sustained hope of gilts being included in global indices for emerging market debt also supported prices, they said.
“When mutual funds buy, such as now, they are deploying a large quantum and all of them have suddenly turned to the buying side,” a dealer at a state-owned bank said. “State-owned banks were adding in the morning, but they will never do that when prices are rising, only on the downtrend to support the market.”
With major bond index providers conducting their half-yearly reviews for index composition this month, foreign investors on indices operated by FTSE Russell and JPMorgan are expected to be pushing for the inclusion of Indian gilts, dealers said. Despite operational roadblocks to the move and the government’s seeming reluctance to smoothen the process, reports of a higher possibility of bond index inclusion – which could drive $30 bln worth of inflows into gilts – continue to drive up gilt prices.
The large chunk of buying activity triggered a wave of short covering by traders who had placed fresh short bets after the disappointing weekly gilt auction outcome on Friday, dealers said.
Short-term bonds were out of favour and lagged the gains in longer-tenure gilts amid lack of clarity on the interest rate trajectory in the US and India, particularly due to caution ahead of the US Federal Open Market Committee’s rate decision on Wednesday, dealers said.
On Wednesday, the US rate-setting panel is widely expected to maintain status quo on rates. Rising US Treasury yields and crude oil prices continued to weigh on gilts and encouraged some traders to book profits, dealers said.
According to data on the Reserve Bank of India’s Negotiated Dealing System–Order Matching platform–the market-wide turnover was 373.65 bln rupees, compared with 368.25 bln rupees at 1530 IST on Friday.
During the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.15-7.22%, while that on the 7.18%, 2033 bond is seen at 7.12-7.18%. (Aaryan Khanna)
India Gilts: Remains down; demand at switch auction seen low
MUMBAI–1200 IST–Prices of government bonds remained down, weighed by an uptick in US Treasury yields and crude oil prices, dealers said. Traders also sold on caution ahead of the outcome of the US Federal Reserve policy review meeting on Wednesday.
The demand at the gilt switch auction today is seen dull as the appetite remained weak after Friday’s weekly auction, dealers said. A switch operation entails replacing securities maturing in the near term with longer-maturity papers, effectively postponing the repayment to a later date. The government has offered to switch six bonds maturing between 2024 and 2027 with seven longer-term bonds.
“Some PSUs (state-owned banks) that have a lot of FRBs (floating rate bonds) may participate in the auction today,” a dealer at a state-owned bank said. “Other than that, the market is just waiting for (Fed Chair Jerome) Powell’s commentary.”
The government has offered to switch floating rate bonds maturing 2024 in the auction today.
Traders are also worried that the moderation in domestic inflation may be slow, weighed down by global commodity prices and the uneven monsoon rainfall so far, dealers said.
“There is nothing positive back home. Inflation is above tolerance band, trade deficit data is not good, and RBI (Reserve Bank of India) did OMOs (open market operations),” a dealer at a private bank said. RBI sold gilts worth 17.75 bln rupees via open market operations in the week ended Sep 8, data released by the RBI on Friday showed.
The fall in the rupee is also raising concerns about higher imported inflation, particularly in tandem with the rise in crude prices. India’s merchandise trade deficit rose to a 10-month high of $24.16 bln in August.
On Wednesday, the US rate-setting panel is widely expected to maintain a status quo on rates. The current Federal target rate is 5.25-5.75%.
Meanwhile, the yield on the benchmark 10-year US Treasury note rose to 4.35%, well above the crucial 4.30% mark, which weighed on domestic bonds. Crude oil prices also hovered around $94 per barrel, which is way above the crucial $85 per barrel mark.
According to data on the Reserve Bank of India’s Negotiated Dealing System–Order Matching platform–the market-wide turnover was 125.60 bln rupees at 1200 IST, compared with 189.30 bln rupees at 1230 IST on Friday.
During the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.18-7.23%, while that on the 7.18%, 2033 bond is seen at 7.16-7.20%. (Nishat Anjum)
India Gilts: Down as appetite for bonds muted post Friday’s auction
MUMBAI–0943 IST–Prices of government bonds fell as the market sentiment was weak due to global cues and lower-than-expected cut off at weekly gilt auction on Friday, dealers said.
On Friday, gilt prices fell sharply after state-owned banks were seen not bidding aggressively at the 310-bln-rupee auction, resulting in lower than expected auction cutoff, dealers speculated.
Traders do not want to hold on the heavy portfolios as they worry regarding the investors’ appetite, dealers said.
“There is no buying momentum right now in the market. US yields are up, crude is also up, so we fell tracking that,” a dealer a state-owned bank said. “Ahead of the Fed meeting, I don’t think anybody would buy heavily.” The US Federal Reserve’s two-day policy review meeting starts on Tuesday.
The state-owned banks are likely to step up purchase if the yield on the 10-year benchmark 2033 bond nears 7.25% levels, dealers said.
Traders refrained from placing bets in the short-term bonds as the banking system liquidity went into deficit, dealers said. At the end of trade on Friday, liquidity in the system was estimated to be in a deficit of 457 bln rupees, against surplus of 26.96 bln rupees on Thursday.
On the global front, yield on the benchmark 10 year US Treasury note remained above the crucial 4.30% mark, which weighed on domestic bonds. A rise in US Treasury yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing to foreign investors.
Meanwhile, crude oil prices also hovered around $94 per barrel, which is way above the crucial $85 per barrel mark. The Reserve Bank of India in its April’s Monetary Policy Report said the baseline assumption for inflation projections vis-a-vis crude oil–Indian basket–is $85 per bbl during 2023-24 (Apr-Mar).
Even though the market widely expects the uptick in crude oil prices to not get passed through to the retail consumer, it worries that the rise in prices may add to the imported inflation, dealers said.
Crude oil prices rose on supply tightness and optimism that the Chinese economy is gaining strength. Brent crude oil future for November delivery was at $94.31 a bbl in early trade as compared to $93.93 per bbl on Friday.
According to data on the Reserve Bank of India’s Negotiated Dealing System–Order Matching platform–the market-wide turnover was 36.45 bln rupees at 0942 IST, compared with 55.10 bln rupees at 0930 IST on Friday.
During the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.18-7.23%, while that on the 7.18%, 2033 bond is seen at 7.16-7.20%. (Nishat Anjum)
India Gilts: Seen opening steady; mkt awaits US Fed policy decision
MUMBAI – Prices of government bonds are seen opening steady as traders may avoid placing aggressive bets ahead of the US Federal Open Market Committee’s two-day meeting starting Tuesday, dealers said.
The yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.17-7.23% today as against 7.20% on Friday. The yield on the 7.18%, 2033 bond is seen at 7.13-7.19% as against 7.16% the previous day.
The trade volume may also remain low as the market lacks significant cues, both on the domestic and global front, dealers said.
The yield on the benchmark 10-year US Treasury note was at 4.33% today as against 4.32% at the time of Indian market close on Friday. The Japanese market is shut today on account of Respect for the Aged Day.
The movement in US Treasury yields in European trade may provide firm cues to the domestic market, dealers said.
The data released in the US on Friday was seen as mixed. Price of goods imported to the US rose more than expected, up 0.5% sequentially in August, on the back of higher energy costs. Export prices meanwhile jumped 1.3% on month. Both export and import prices were the highest in more than a year.
Annually, import prices declined 3.0% in August after decreasing 4.6% in July, notching their seventh straight month of decline, the US Labor Department said.
Moreover, the University of Michigan’s consumer sentiment report showed a sharp drop in inflation expectations. Inflation outlook for one year fell to 3.1%, the lowest since March 2021, from 3.5% last month. Meanwhile, the five-year outlook slumped to 2.7%.
According to CME’s FedWatch tool, 99% of the Fed fund future traders expect the US rate-setting panel to maintain status quo and hold the Fed funds target rate at 5.25%-5.00%, in their upcoming policy review outcome on Wednesday.
Meanwhile, a 68.5% expect the same at the conclusion of its November meeting, while around 30% expect a rate hike of 25 basis points. (Nishat Anjum)
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by xx
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