India Gilts Review:Off lows as 10-yr bond yld not seen topping 6.60%
Thursday, Dec 26
By Suyash Pande
MUMBAI – Government bonds ended off lows today as market participants covered short bets after noting that the yield on the 10-year benchmark 6.45%, 2029 bond did not rise above 6.60% due to buying support at those levels in the absence of significant cues, dealers said.
Market participation was muted due to the absence of cues and due to a truncated trading week amid Christmas and New Year holidays.
The 6.45%, 2029 bond ended at 99.05 rupees or 6.5818% yield, against 99.08 rupees or 6.5772% yield on Tuesday. Domestic financial markets were closed on Wednesday on account of Christmas.
Market participants were averse to building short bets on the 10-year benchmark 6.45%, 2033 bond due to expectations that in the near term, the Reserve Bank of India would purchase papers in the 10-14 year segment in a similar operation as the one conducted earlier this week.
The central bank bought 100 bln rupees worth of 10-year benchmark 6.45%, 2029 bond at a cut-off price of 99.30 rupees and sold 68.25 bln rupees of bonds maturing in 2020.
Dealers said the RBI would continue with such operations because the spread between the yield on 10-year bond and the repo rate was still elevated at 143 basis points. Typically, the spread is less than 50 basis points.
“See, trade volumes were not there and people are not comfortable to go short at these levels. When you know that there is a buyer at 99.30 rupees (RBI’s cut-off price), people are a little sceptical of going short at these levels,” a dealer with a primary dealership said.
Some market participants also covered their short bets due to expectations that the RBI could announce a simultaneous buy/sell OMO after market hours today.
“There are some sections of course that expect them (RBI) to announce an OMO today, so people are buying at these levels,” a dealer with a private bank said. “No one has clarity on the fiscal side or the timing of these operations, so market does not have strong cues.”
Bonds began their day on the back foot due to an overnight rise in crude oil prices. The crude oil contract for February delivery on the New York Mercantile Exchange ended $0.59 higher at $61.11 per barrel on Tuesday. The contract rose to a high of $61.54 per bbl today.
A rise in crude oil prices poses an upside risk to headline inflation and eats into the room for RBI to cut interest rates.
Growing suspense over the state of the Centre’s finances also weighed on government bonds earlier in the day.
While most market participants expect the Centre to overshoot its fiscal deficit target of 3.3% of GDP, traders are unsure of the extent of additional borrowing that the government may announce, if any. Some investors expect the government to dip into small savings collections to help it get close to the fiscal deficit number.
Concerns on the Centre’s finances were fuelled after media reports on Tuesday said the government might not meet its divestment target for the current financial year.
The Union Budget for 2019-20 (Apr-Mar) had pegged the divestment target at a record high 1.05 trln rupees, and the government has so far mopped up 173.64 bln rupees.
Market-wide turnover was 216.40 bln rupees, against 251.3 bln rupees on Tuesday, according to the RBI’s Negotiated Dealing System – Order Matching platform.
Longer-tenured government bonds are expected to open sharply higher on Friday because the RBI, after market hours, announced it would purchase up to 100 bln rupees of the 10-year benchmark 6.45%, 2029 bond. The yield on the paper is expected to fall by 3-5 basis points.
However, the yield on short-term bonds may rise as the RBI would simultaneously sell up to 100 bln rupees of four gilts maturing in 2020.
The RBI has offered to purchase the 6.45%, 2029, bond–the current 10-year benchmark government security–while it has offered to sell four short-term bonds–the 6.65%, 2020, bond, 7.80%, 2020, bond, 8.27%, 2020, bond, and the 8.12%, 2020, bond.
This is the second time that the RBI has conducted such an operation and the move is seen as aimed at compressing the term premia.
The spread between the yield on the 10-year benchmark 6.45%, 2029 bond and repo rate is still elevated at over 140 basis points. Market participants expect 300-500 bln rupees of such operations.
Later during the day, bond prices may also take cues from a 160-bln-rupee gilt auction.
The government is scheduled to sell 40 bln rupees of the 6.18%, 2024 bond; 60 bln rupees of the floating rate bond maturing in 2031; 20 bln rupees of the 7.69%, 2043 bond, and 40 bln rupees of the 7.72%, 2049 bond.
Any sharp overnight movement in US Treasury yields or crude oil prices may also steer bonds in early trade.
The yield on the 10-year benchmark 6.45%, 2029, bond is seen in a band of 6.45-6.55%, against 6.58% at close today.
India Gilts: Off lows as 10-yr benchmark yld not seen topping 6.60%
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India Gilts: Off lows as 10-yr benchmark yld not seen topping 6.60%
MUMBAI–1600 IST–Government bonds came off lows because market participants covered short bets as the yield on the 10-year benchmark 6.45%, 2029 bond is not seen rising above 6.60% in the absence of significant domestic cues, dealers said.
Bonds were weighed down by concerns over the Centre’s finances and the likelihood of additional market borrowing because the government is widely expected to miss its fiscal deficit target of 3.3% of GDP. The Centre’s finances were already strained by weak revenue collections and tax cuts carried out earlier this year, and the possibility that the divestment target for this financial year may not be met has fuelled discomfort among market participants.
“I think the market is going to stay between 6.55-6.60% (the yield on the 6.45%, 2029 bond) because at one side you have buying support and then you also don’t have any clarity on the fiscal side,” a dealer with a private bank said. “People will wait for some macroeconomic data point or some announcement from the RBI before taking the yield lower.”
Market participants expect the Reserve Bank of India to continue purchases and sales of government securities through open market operations to compress the term premium. The spread between the 10-year benchmark 6.45%, 2029 bond and the repo rate is still at over 140 basis points. Typically, in a rate cut cycle, the spread is less than 50 basis points.
The yield on the 10-year benchmark 6.45%, 2029 bond fell by over 16 basis points after the RBI announced simultaneous purchase and sales of government bonds last week.
The yield on the 10-year benchmark 6.45%, 2029 bond is seen in range of 6.55-6.60% for the rest of the day. (Suyash Pande)
India Gilts: Down on rise in crude, profit booking post recent surge
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NEW DELHI– 0950 IST–Prices of government bonds were down today because a sharp rise in prices of crude oil weakened the market’s appetite for dated securities, dealers said.
Crude oil futures contract for February delivery on the New York Mercantile Exchange ended $0.59 higher at $61.11 per barrel on Tuesday. Global markets were shut on Wednesday for Christmas. The February contract on the NYMEX was last at $61.36 per barrel. A rise in crude oil prices threatens to push inflation higher as India is a net importer of the commodity.
Bonds were also under pressure as some market participants took the opportunity to lock in profits after a surge in prices over the last few days.
Yield on the 10-year benchmark 6.45%, 2029 bond has dropped 17 basis points since Dec 19 as the market cheered the Reserve Bank of India’s decision to purchase long-term bonds under open market operations. The central bank also simultaneously announced sales of short-term bonds under open market operations.
Market participants believe that the simultaneous purchases and sales of bonds through open market operations are aimed at cooling off term premia in the bond market. Yield on the 10-year benchmark 6.45%, 2029 bond is still a whopping 144 basis points higher than the RBI’s repo rate of 5.15%. Typically, when the central bank’s stance is accommodative, like the RBI’s current one, the spread between the 10-year bond yield and the repo rate is less than 50 bps.
“Bonds are tracking the rise in crude oil prices as the rise is seen to have an impact on India’s inflation with OPEC (Organization of the Petroleum Exporting Countries) expected to constrain the supply next year,” a dealer with a state-owned bank said.
“There is a bout of profit booking as well that has led to a fall in prices; traders now want to lighten their portfolios after the recent rise before the year ends,” the dealers said.
Mounting concerns over the Centre’s fiscal position also prompted traders to reduce exposure on their bond portfolios, dealers said. The government is widely expected to overshoot its fiscal deficit target of 3.3% of GDP for 2019-20 (Apr-Mar) as a sharp slowdown in economic growth has led to weak revenue collections. A fiscal slippage is likely to be accompanied by additional market borrowing.
Yield on the 10-year benchmark 6.45%, 2029, bond is seen in a band of 6.56-6.61% during the day, dealers said. (Vaibhav Chakraborty)
India Gilts: Seen marginally down on rise in crude oil prices
NEW DELHI – Government bond prices are seen opening slightly down because of a rise in crude oil prices, which may curb the market’s appetite for dated securities.
Crude oil futures contract for February delivery on the New York Mercantile Exchange ended $0.59 higher at $61.11 per barrel on Tuesday. Global markets were shut on Wednesday for Christmas. The contract was last at $61.35.
Some traders may take the opportunity to lock in profit after the recent plunge in bond yields following the announcement of open market operations by the Reserve Bank of India.
Yields on longer-tenured bonds fell sharply by close to 12-13 basis points after the RBI last week announced it would simultaneously purchase and sell government securities through open market operations.
Some market participants expect that the central bank to announce, after market hours today, another round of simultaneous buying and selling of dated securities through open market operations that is likely to pull down yields of longer-maturity papers.
However, market participants expect the government to overshoot its fiscal deficit target of 3.3% of GDP because of weak revenue collections. The government typically takes stock of its finances towards the end of the year after receiving the third instalment of advance corporate tax to give a clearer picture as to how much additional market borrowing may be required to meet its deficit.
A fiscal slippage comes with the dreaded prospect of additional market borrowing, which may be difficult for the market to absorb considering that they are already faced with a record-high borrowing of 7.10 trln rupees in 2019-20 (Apr-Mar).
Bonds may be confined to a narrow band during the day as market participation is seen subdued due to the year-end.
Yield on the 10-year benchmark 6.45%, 2029, bond is seen in a band of 6.56-6.61% against 6.58% at close on Tuesday. (Vaibhav Chakraborty) End
US$1 = 71.3100 rupees
Edited by Avishek Dutta
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