India Gilts Review:10-yr benchmark bond falls on switch announcement

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India Gilts Review:10-yr bond falls on switch announcement

Tuesday, Oct 22

 

By Vaibhav Chakraborty

 

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NEW DELHI – The 10-year benchmark 6.45%, 2029 bond weakened today because the supply of the paper is set to increase dramatically this week, after the government offered 200 bln rupees worth of the security in a switch auction, dealers said.

 

Other bonds were steady in the absence of firm trading cues in a truncated week.

 

Today, the 6.45%, 2029 bond settled at 99.32 rupees or 6.54% yield as against 99.50 rupees or 6.52% yield on Friday. The bond market was shut on Monday because of Assembly Elections in Maharashtra.

 

After trading hours on Friday, the government announced an auction to switch four bonds worth 200 bln rupees with the benchmark bond. Money markets were closed on Monday on account of Assembly elections in Maharashtra. The switch auction will be held on Thursday.

 

In a switch operation, the government switches bonds of shorter tenures with those of longer tenures, effectively delaying repayment to a later date.

 

Given that the 6.45%, 2029 bond was last auctioned on Friday, the market will now be hit with heavy supply of the paper in back-to-back weeks.

 

The 6.45%, 2029 bond, which was issued for the first time earlier this month, has so far been protected from heavy selling pressure because of the low outstanding amount on the bond. 

 

After Friday’s auction, in which the bond was sold for 70 bln rupees, the outstanding amount of the 6.45%, 2029 gilt rose to 140 bln rupees.

 

Ever since the government started conducting switches of bonds with the market in April, the most heavily offered have been 10-year benchmark bonds.

 

Given that the longer-tenure bonds are typically offered at a discount at switch auctions, market participants have lapped up the opportunity to acquire the benchmark bonds cheaply.  

 

While this has ensured the success of switch operations, it has reduced the shelf lives of the benchmark papers and introduced an element of uncertainty about when supply of these bonds will hit the market.

 

The government’s target for gilt switches for the current financial year is 500 bln rupees. Of this, the government has already conducted switches worth 401 bln rupees, with the bulk of such operations being held with the prevailing 10-year benchmark bond.  

 

“The news of switch has impacted the 10-year, it has come unexpectedly and disappointed the market considering there was an auction past Friday, and now they are buying the shorter-tenure bonds which will be switched at the auction. However, if you see the volumes have been way too low largely because of the holidays lined up,” a dealer with a private bank said.

 

While the 6.45%, 2029 bond fell today, expectation of more rate cuts by the Reserve Bank of India after the release of the minutes of the central bank’s Oct 1-4 policy meeting, pushed up prices of other bonds marginally, dealers said.

 

In the minutes, released after market hours on Friday, RBI Governor Shaktikanta Das said it was necessary to make “all out efforts” to boost investment and private consumption.

 

The central bank has lowered the repo rate by a cumulative 135 basis points so far in 2019 to support the economy. Bond traders expect at least 25 bps more of rate cuts over the near term.

 

“On the whole, the minutes are dovish; even if there are two members of the MPC who may not be very dovish, the governor’s view and the rest of the others are clearly indicating that more rate cuts will happen,” a dealer with a primary dealership said.

 

“We don’t expect a big rally in bonds from hereon because of the fiscal risks but the short-end will definitely stay anchored because of rate cuts,” the dealer said.   

 

Market-wide turnover was at 134.10 bln rupees against 184.25 bln rupees on Friday, according to RBI’s Negotiated Dealing System – Order Matching platform.

 

Government bonds may open steady on Wednesday because traders are likely to stay on the sidelines in the absence of fresh triggers. Market participation may be thin due to low attendance at treasury desks during the festive season.

 

The 10-year benchmark 6.45%, 2029 bond may underperform as the supply of the paper is set to rise sharply after a switch auction this week.

 

Any sharp overnight movement in US Treasury yields and global crude may steer bonds in early trade.

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a band of 6.52-6.57%.

 

  TODAY Friday
Price Yield Price Yield

7.32%, 2024

103.8125

6.2830%

103.7950 6.2883%

7.17%, 2028

102.4000

6.7816%

102.5000 6.7662%
7.26%, 2029 103.7400 6.7076% 103.8000 6.6991%
6.45%, 2029 99.3200 6.5434% 99.5000 6.5185%
7.57%, 2033 104.5400 7.0452% 104.6300 7.0352%

India Gilts: In thin band on lack of fresh cues, volumes lacklustre

 

  1510 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
6.45%, 2029
PRICE (rupees) 99.37 99.44 99.30 99.33 99.50
YTM (%)       6.5365 6.5271 6.5462 6.5421 6.5185

 

  1510 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
7.26%, 2029
PRICE (rupees) 103.75 103.83 103.67 103.70 103.80
YTM (%)       6.7068 6.6954 6.7176 6.7133 6.6991

 

NEW DELHI–1510 IST–Government bonds were confined to a thin band amid low volumes because market participants kept to the sidelines in the absence of fresh triggers and ahead of a truncated trading week, dealers said.

 

Money markets were shut on Monday because of Assembly elections in Maharashtra and will be shut again on Monday on account of Diwali Balipratipada.

 

The price of the 10-year benchmark 6.45%, 2029 bond remained down as the supply of the paper is set to increase sharply after the government offered a massive 200 bln rupees worth of the bond in a switch auction, to be conducted on Thursday. In a switch operation, the government offers longer-maturity bonds in lieu of shorter-tenure debt, effectively postponing debt repayments. 

 

However, most other bond prices were marginally higher as the minutes of the Reserve Bank of India’s Oct 1-4 monetary policy meeting strengthened hope of rate cuts in coming months.

 

In the minutes, released after market hours on Friday, RBI Governor Shaktikanta Das said that it was necessary to make “all out efforts” to boost investment and private consumption. The central bank has lowered the repo rate by a cumulative 135 basis points in 2019 in order to boost slowing economic growth.  

 

Even as interest rates are expected to be lowered further, with the central bank’s next policy review a good month and a half away, there were few trading cues for bonds, dealers said. 

 

Trade volumes were lacklustre, with worth 81.75 bln rupees struck by 1430 IST, much lower than the 150-250 bln rupees worth of usually struck by the same time, Clearing Corp of India data showed. 

 

“The volumes have been modest considering there isn’t any fresh cue available for the traders to trade on, moreover, some traders have chosen to remain on the sidelines because of a truncated week, with several festivals including Diwali lined up…,” a dealer with a primary dealership said.

 

“The new 10-year (6.45%, 2029 paper) is largely down because of the overloaded supply of the paper through switch auction on Thursday,” the dealer said. 

 

Yield on the 10-year benchmark 6.45%, 2029 paper is seen in a band of 6.52-6.55% for the rest of the day, dealers said. (Vaibhav Chakraborty)


India Gilts: 10-yr benchmark down on switch notice; MPC minutes aid

 

  1015 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
6.45%, 2029
PRICE (rupees) 99.37 99.38 99.30 99.33 99.50
YTM (%)       6.5365 6.5358 6.5462 6.5421 6.5185

 

  1015 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
7.26%, 2029
PRICE (rupees) 103.77 103.77 103.67 103.70 103.80
YTM (%)       6.7040 6.7033 6.7176 6.7133 6.6991

 

–-1015 IST–The 10-year benchmark bond 6.45%, 2029 bond fell today as the supply of the paper is set to rise sharply this week through a switch operation, dealers said.

 

After trading hours on Friday, the government announced an auction to switch four bonds worth 200 bln rupees with the benchmark bond. Money markets were closed on Monday on account of Assembly elections in Maharashtra. The switch auction will be held on Thursday.

 

In a switch operation, the government switches bonds of shorter tenures with those of longer tenures, effectively delaying repayment to a later date.

 

Given that the 6.45%, 2029 bond was last auctioned on Friday, the market will now be hit with heavy supply of the paper in back-to-back weeks. The 6.45%, 2029 bond, which was issued for the first time earlier this month, has so far been protected from heavy selling pressure because of the low outstanding amount on the bond. 

 

After Friday’s auction, in which the bond was sold for 70 bln rupees, the outstanding amount of the 6.45%, 2029 gilt is set to rise to 140 bln rupees.

 

Ever since the government started conducting switches of bonds with the market, the most heavily offered securities have been 10-year benchmark bonds. While this has ensured the success of switch operations, it has reduced the shelf lives of the benchmark papers and introduced an element of uncertainty about when supply of these bonds will hit the market.  

 

An overnight rise in US Treasury yields also weighed on domestic bond prices, dealers said. Yield on the 10-year US Treasury note rose 4 basis points to settle at 1.80% on Monday. 

 

“Extra supply through the switch auction and rise in US yields is because of which prices are down,” a dealer with a state-owned bank said. 

 

Despite the rise in US Treasury yields, most other bonds were largely steady because the minutes of the Reserve Bank of India’s Oct 1-4 monetary policy meeting reinforced expectation of more rate cuts, dealers said. 

 

The minutes, released after market hours on Friday, showed RBI Governor Shaktikanta Das as saying that the economy needs “all out efforts” to boost investment and private consumption. So far in 2019, the central bank has cut the repo rate by a cumulative 135 bps in order to boost slowing growth.

 

Yield on the 10-year benchmark 6.45%, 2029 paper is seen in a band of 6.52-6.55%, dealers said. (Suyash Pande)


India Gilts: 10-yr bond seen down on switch notice; MPC minutes to aid

 

MUMBAI – The 10-year benchmark 6.45%, 2029 bond is seen opening lower today as huge supply of the paper is likely to hit the market after the Centre announced a switch of the security.

 

After trading hours on Friday, the government had announced an auction to switch four bonds worth 200 bln rupees with the benchmark bond. Money markets were closed on Monday on account of Assembly elections in Maharashtra.

 

In a switch operation, the government switches bonds of shorter tenures with those of longer tenures, effectively delaying repayment to a later date.

 

The 6.45%, 2029 bond, which was auctioned for the first time earlier this month, has so far been protected from heavy selling pressure because of the low outstanding amount of the paper. After its latest auction on Friday, the 6.45%, 2029 bond has an outstanding of 140 bln rupees.

 

Higher expectations of a rate cut by the central bank because minutes of the latest monetary policy meeting showed that most members saw space for more easing in the monetary policy may aid other government bonds.

 

The minutes, released after market hours on Friday, showed RBI Governor Shaktikanta Das as saying that the economy needs “all out efforts” to boost investment and private consumption.

 

So far in 2019, the central bank has lowered the repo rate by 135 basis points, and given the weakness in economic growth, bond traders expect at least 25 bps more of rate cuts over the near term.

 

However, fresh with Pakistan may weaken risk appetite and limit the market’s enthusiasm for bonds.

 

On Sunday, the Indian Army launched on terror camps locate inside Pakistan-occupied Kashmir, where three camps were destroyed and up to 10 soldiers of the Pakistan army were killed, as per various media reports.

 

A rise in the US Treasury yields are also likely to weigh on bonds. Yield on the 10-year US Treasury note ended 4-basis point up to settle at 1.80% on Monday. Higher yields on US bonds tend to reduce foreign ’ appetite for assets in riskier emerging markets such as India.

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a band of 6.52-6.58% as against 6.52% at close on Friday.  (Suyash Pande)  End

 

US$1 = 70.9300 rupees

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

 

Edited by Aditya Sakorkar

 

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