India Gilts Review:Down as cutoff prices at switch below expectation

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Gilts Review:Down as cutoff prices at switch below expectation

Monday, Jan 20

 

By Suyash Pande

 

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MUMBAI – Government ended down today because lower-than-expected cutoff prices at today’s switch auction dented the appetite for dated securities, dealers said.

 

The 10-year benchmark 6.45%, 2029 bond closed at 98.62 rupees or 6.64% yield, against 98.74 rupees or 6.63% yield on Friday.

 

A switch operation entails replacing a short-term security with a longer maturity paper, effectively postponing the government’s debt repayment to a later year.

 

The government today switched four bonds maturing in 2020 worth 129.5 bln rupees with the 6.45%, 2029 paper and the 6.18%, 2024 paper.

 

The government switched 101.28 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, the 8.27%, 2020 bond, and the 8.12%, 2020 bond with the 6.45%, 2029 bond. The Centre had notified 200 bln rupees for this switch operation.

 

It also switched 28.25 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, and the 8.27%, 2020 bond with the 6.18%, 2024 bond. The Centre had notified 50 bln rupees for this switch.

 

The cut-off price for the 10-year benchmark 6.45%, 2029 bond was set at 98.42 rupees or 6.6718% yield, sharply lower than the median estimate of 98.54 rupees according to a Cogencis poll of 10 estimates. The cut-off price for 6.18%, 2024 was also lower than expectations at 98.87 rupees.

 

Market participants had remained uncertain for most of the day about the of the 10-year benchmark 6.45%, 2029 bond that would rise as a result of the switch operation.

 

Very few traders had expected the 200 bln rupees of the 6.45%, 2029 bond which was notified to be actually supplied by the Centre

 

“The tendering was itself not 250 bln rupees so it was natural that there would be weak pricing if they had to supply the paper (6.45%, 2029 bond),” a dealer with a private bank said.

 

Some market participants were concerned whether the government could do more switches before the Union Budget 2020-21 is to be presented on Feb 1 in order to bring down the gross market borrowing for next financial year.

 

“It may be difficult for them (government) to do more switches before the budget, but they can announce in the budget that they will conduct one switch in February and one in March and show that in the gross borrowing for next year,” a dealer with another private bank said.

 

Before today, the Centre had already conducted switch operations worth 727.12 bln rupees in 2019-20 (Apr-Mar) with the market. The Centre has also switched bonds worth 419.2 bln rupees with the Reserve Bank of India. The Union Budget 2019-20 (Mar-Apr) had pegged the target for switch operations at 500 bln rupees.

 

The net outstanding amount of the 10-year benchmark 6.45%, 2029 bond after today’s switch auction would reach 905.76 bln rupees.

 

Market participants have slowly started taking off the premium that the paper commands as the 10-year benchmark bond and begun moving to bonds of closer maturities such as 7.27%, 2026 and 7.57%, 2033, dealers said.

 

The bonds maturing in 2026 and 2033 were supported by the announcement made by the central bank on Thursday of another round of special open market operations.

 

The RBI said it will purchase up to 100 bln rupees of 7.32%, 2024 and 6.45%, 2029 bonds and simultaneously sell up to 100 bln rupees of 7.80%, 2021 and 7.94%, 2021 papers. This would be the fourth such operation by the central bank and is seen as an attempt to cool off the term premia.         

 

Bonds had started the day on the back foot weighed by a rise in crude oil prices in Asian trade.

 

Crude oil for February delivery on the rose to a high of $59.73 per barrel as against the previous close of $58.54 per barrel.

 

A rise in crude oil prices poses an upside risk to and weakens the case for the RBI to cut interest rates.

 

Market-wide turnover was 182.20 bln rupees, against 392.35 bln rupees on Friday, according to the RBI’s Negotiated Dealing System – Order Matching platform.

 

OUTLOOK

Most government bonds are seen up on Tuesday as appetite for dated securities may be supported ahead of the RBI’s special open market operation on Thursday.

 

The 6.45%, 2029 bond may underperform as the paper is now losing the premium that it commands as the 10-year benchmark because its supply has risen sharply over the last few days.

 

Typically, the government stops issuing a bond as its net outstanding amount on the paper reaches close to 1.2 trln rupees.

 

  TODAY FRIDAY
Price Yield Price Yield

7.32%, 2024

 103.1525  6.4171%  103.1975  6.4050%

7.27%, 2026

 103.1800  6.6343%  103.2200  6.6267%
7.26%, 2029  102.5900  6.8684%  102.6900  6.8537%
6.45%, 2029  98.6175  6.6436%  98.7400  6.6262%
7.57%, 2033  104.3800

 7.0582%

 104.4650

 7.0486%


 

India Gilts:6.45%, 2029 bond dn more; switch cutoff below expectation

 

  1625 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
6.45%, 2029
PRICE (rupees) 98.59 98.73 98.57 98.70 98.74
YTM (%)       6.6476 6.6276 6.6511 6.6319 6.6262

 

MUMBAI-–1625–The 10-year benchmark 6.45%, 2029 bond fell further after lower-than-expected cutoff price for the 6.45%, 2029 bond at the switch auction dented the appetite for dated securities, dealers said. 

 

The government today switched four bonds maturing in 2020 worth 129.5 bln rupees with the 6.45%, 2029 paper and the 6.18%, 2024 paper. 

 

The government switched 101.28 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, the 8.27%, 2020 bond, and the 8.12%, 2020 bond with the 6.45%, 2029 bond. It also switched 28.25 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, and the 8.27%, 2020 bond with the 6.18%, 2024 bond.

 

The cut-off price for the 10-year benchmark 6.45%, 2029 bond was set at 98.42 rupees or 6.6718% yield, sharply lower than the median estimate of 98.54 rupees according to a Cogencis poll of 10 estimates. The cut-off price for 6.18%, 2024 was also lower than expectations at 98.87 rupees. 

 

“The cutoff price was lower than what most people were expecting. They (RBI) has basically given away the paper at whatever prices because they wanted to take away the 2020 paper,” a dealer with a private bank said. 

 

“It (Cut-off price) was always depended on the amount that they were going to supply. You know with the way switches are being conducted we cannot rule out the possibility of another switch being conducted just to bring down the gross borrowing number for next fiscal.”

 

Before today, the Centre had already conducted switch operations worth 727.12 bln rupees in 2019-20 (Apr-Mar) with the market. The Centre has also switched bonds worth 419.2 bln rupees with the Reserve Bank of India. The Union Budget 2019-20 (Mar-Apr) had pegged the target for switch operations at 500 bln rupees. 


India Gilts: Down on rise in , switch auction in focus

 

  0945 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
6.45%, 2029
PRICE (rupees) 98.64 98.72 98.62 98.70 98.74
YTM (%)       6.6404 6.6290 6.6440 6.6319 6.6262

 

MUMBAI–-0945 IST–Government bonds fell today because of a rise in crude oil prices in Asian trade, and the 10-year benchmark 6.45%, 2029 paper was the worst performing security as its supply is likely to increase through switch operation today, dealers said. 

 

Crude for February delivery on the New York Mercantile Exchange rose $0.59 to $59.13 per barrel. Prices of crude oil rose due to concerns of disruption in supply of the after unrest in and Iraq led to halting production in major oil fields. 

 

A rise in crude oil prices poses an upside risk to retail inflation and weakens the case for Reserve Bank of India to cut interest rates.

 

The 10-year benchmark 6.45%, 2029 bond was further weighed by the expectation of an increase in supply of the paper through the switch operation to be held later today. 

 

The government has offered to switch 200 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, the 8.27%, 2020 bond, and the 8.12%, 2020 bond with the 6.45%, 2029 bond. It has also offered to switch 50 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, and the 8.27%, 2020 bond with the 6.18%, 2024 bond.

 

“Mainly people are waiting to see how much of the 6.45%, 2029 bond they (RBI) are going to supply and that paper is down because of that. I personally feel they (RBI) will try to at least supply 100 bln rupees of that paper,” a dealer with a state-owned bank said. “People will be more interested in the 6.18%, 2024 paper and that switch should go through easily.”

 

After the gilt auction on Friday, net outstanding amount on the 10-year benchmark 6.45%, 2029 bond increased to 804.48 bln rupees. Market participants believe the paper is slowly losing the premium it commands as the 10-year benchmark bond and traders have started shifting to papers of maturities close to 10 years such as the 7.27%, 2026 and 7.57%, 2033. 

 

Typically, the government stops issuing a bond as its net outstanding amount on the paper reaches close to 1.2 trln rupees. 

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a range of 6.62-6.67% for rest of the day.  (Suyash Pande)


India Gilts: Seen dn as crude up in Asian trade, switch auction eyed

 

MUMBAI – Government bonds are seen opening lower today because a rise in crude oil prices in Asian trade may dampen appetite for dated securities.

 

Crude oil futures for February delivery on the New York Mercantile Exchange rose $0.62 today and was last at $59.16 per barrel. The rise was due to fears of disruption in supply of the commodity after armed forces shut production in Libya’s largest

 

A rise in prices of crude oil poses an upside risk to inflation and weakens the case for Reserve Bank of India to cut interest rates.

 

A rise in US Treasury yields is also seen weighing on government bonds in early trade today. The yield on the 10-year US Treasury note ended 3 basis points higher to settle at 1.84% on Friday. A rise in US treasury yields typically prompts foreign portfolio investors to sell fixed income assets in riskier emerging markets such as India. 

 

However, any fall in prices may be limited because of the central bank’s announcement to conduct a special open market operation on Thursday. The RBI said that it would buy up to 100 bln rupees of the 7.32%, 2024 and 6.45%, 2029 bonds and simultaneously sell up to 100 bln rupees of the 7.80%, 2021 and 7.94%, 2021 papers. The move is seen as an attempt to cool elevated term premia. 

 

The 10-year benchmark 6.45%, 2029 bond is seen underperforming today because the paper is up for switch today.

 

The government has offered to switch 200 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, the 8.27%, 2020 bond, and the 8.12%, 2020 bond with the 6.45%, 2029 bond. It has also offered to switch 50 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, and the 8.27%, 2020 bond with the 6.18%, 2024 bond.

 

The net outstanding on the 10-year benchmark 6.45%, 2029 bond after the auction on Friday increased to 804.48 bln rupees. Market participants do not expect the 6.45%, 2029 bond to retain its benchmark status for much longer. Usually, the government issues a new bond once the net outstanding amount on the paper rises above 1.2 trln rupees. 

 

The yield on the 10-year benchmark 6.45%, 2029 bond is seen in a range of 6.61-6.65%, against the previous close of 6.63%. (Suyash Pande)

 

End

US$1 = 71.10 rupees (at 1700 IST)

 

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

 

Edited by Arshad Hussain

 

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This copy was first published on the Cogencis WorkStation

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Source: Cogencis

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