India Gilts Review: Down ahead of switch auction Mon; volumes muted

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India Gilts Review: Down ahead of switch Mon; volumes muted

Thursday, Feb 20

 

By Suyash Pande

 

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MUMBAI-Government bonds ended sharply lower today because participants trimmed their holdings ahead of the extended weekend and on the announcement by the Reserve Bank of India to conduct switch operation, dealers said.

 

Yield on the 10-year benchmark 6.45%, 2029 bond rose above the psychologically crucial 6.40% mark, which triggered stop-losses, dealers said. Money markets are shut on Friday on account of Mahashivratri.

 

Today, the 10-year benchmark 6.45%, 2029 bond closed at 100.17 rupees or 6.4247% yield as against 100.44 rupees or 6.3864% yield on Tuesday. Money markets were shut on Wednesday on account of Chhatrapati Shivaji Maharaj Jayanti. 
 

The Reserve Bank of India on Thursday announced a switch auction on Monday where eight gilts, aggregating to 370 bln rupees, will be offered for exchange with 7.57%, 2033 bond and 6.18%, 2024 bond. The 7.57%, 2033 bond was the worst performing paper and closed 37 paise lower.

 

in the last one hour was very confusing because largely PSUs (state-owned banks) did not expect the yield to go above 6.40% (on 6.45, 2029 paper) so it will be interesting to see the intra-day trade data for today,” said a dealer with a state-owned bank.

 

“There is switch operation which has certainly weighed on the market and I think some people have churned their portfolios.”

 

The government revised its target for switches earlier this month to 1.65 tln rupees from 500 bln rupees proposed in the for 2019-20 (Apr-Mar). The government has already conducted switches worth 1.28 trln rupees.

 

Muted trade volumes ahead of the long weekend exacerbated price movement today, dealers said.

 

Typically, switch operations are seen as an attempt to smoothen the maturity profile of the government where the Centre exchanges short term bonds with longer maturity papers.

 

However, this time, the large quantum offered for 6.18%, 2024 bond in exchange for three bonds also maturing in 2024 would reduce the interest payment costs for the government, and at the same time increase liquidity of the 6.18%, 2024 paper. The net outstanding on the 6.18%, 2024 paper is currently at 278.74 bln rupees.

 

The Centre has offered to switch 250 bln rupees of the 7.35%, 2024 bond, the 8.40%, 2024 bond, and the 9.15%, 2024 bond with the 6.18%, 2024 bond.

 

Market participants believe that the high-yield papers offered for exchange with 6.18%, 2024 bond might have been part of the held-to-maturity segment of some portfolios, and the switch operation would allow banks to reduce holdings of such papers. This operation would, in exchange, allow banks to get an on-the-run paper.

 

Government bonds began the day on the backfoot because of a sharp overnight rise in crude prices. Crude contract was last at $53.69 per barrel on the New York Mercantile Exchange. A rise in crude prices poses an upside risk to retail inflation and weakens the case for the RBI to cut .

 

Traders awaited the release of minutes of monetary policy meeting held earlier this month for further cues on interest rates and policy stance going forward.

 

While the RBI refrained from cutting interest rates and called the outlook on inflation highly uncertain, the central bank announced revision to its liquidity management framework and also announced long term repo operations.

 

The RBI removed the call for liquidity to be “close to deficit” and also removed quantitative ceilings on liquidity surplus. The central bank also announced that it will conduct long term repo operations of up to 1 trln rupees at the policy rate for tenors of one year and three years.

 

Yield on the 10-year benchmark 6.45%, 2029 bond has fallen by 9 basis points and that on 7.32%, 2024 bond has fallen by 28 basis points since Feb 5.  

 

However, market participants this week have refrained from placing large bets because of trading holidays on Wednesday and Friday and took the opportunity to book profits. 

 

The market-wide turnover fell to 256.5 bln rupees from 457.80 bln rupees on Tuesday, according to the RBI’s Negotiated Dealing System – Order Matching .

 

OUTLOOK

Government bonds are expected to open steady on Monday as market participants may refrain from placing large bets ahead of the switch auction. 

 

The government has offered to switch 120 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, the 8.27%, 2020 bond, the 8.12%, 2020 bond, and 7.00%, 2021 bond with the 7.57%, 2033 bond.

 

It has also offered to switch 250 bln rupees of the 7.35%, 2024 bond, the 8.40%, 2024 bond, and the 9.15%, 2024 bond with the 6.18%, 2024 bond.

 

Comments made in minutes of meeting of the monetary policy meeting earlier this month may support government bonds. Members of monetary policy committee said they expect retail inflation to fall in the coming months and expressed concern over

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a band of 6.38-6.45% on Monday. 

 

  TODAY TUESDAY
Price Yield Price Yield

7.32%, 2024

 104.7125  5.9185%  104.8550  5.9185%

7.27%, 2026

 105.0000  6.2346%  105.2000  6.2346%
7.26%, 2029  104.3000  6.5773%  104.5350  6.5773%
6.45%, 2029  100.1700  6.3864%  100.4425  6.3864%
7.57%, 2033  107.4700

 6.6711%

 107.8400

 6.6711%

 


India Gilts:Remain down, mkt participation low ahead of long weeken

 

  1325 IST   PRICE HIGH   PRICE LOW        OPEN     PREVIOUS
6.45%, 2029
PRICE (rupees) 100.42 100.48 100.34 100.45 100.44
YTM (%)       6.3903 6.3812 6.4008 6.3854 6.3864

 

MUMBAI-–1325 IST–Government bonds remained down owing to a rise in global crude oil prices but market participation remained muted ahead of a long weekend, dealers said.  

 

Crude for April delivery rose by $1.2 to $53.49 per barrel on the New York Mercantile Exchange. The contract was last at $53.51 per barrel. A rise in crude oil prices poses an upside risk to retail inflation and weakens the case for the RBI to cut interest rates. 

 

“Crude has risen quite a bit and generally speaking the market is taking note of global factors because people don’t want to have positions before the long weekend,” a dealer with a state-owned bank said.

 

Government bonds were also weighed by the announcement of switch operations on Tuesday. The government has offered to switch eight bonds aggregating to 370 bln rupees with 7.57%, 2033 bond and 6.18%, 2024 bond.  

 

While typically switch operations are seen as an attempt to smoothen the maturity profile of the government, traders believe that the large quantum offered for 6.18%, 2024 bond in exchange for three bonds also maturing in 2024 would reduce the interest payment costs for the government and at the same time increase liquidity of the 6.18%, 2024 paper. The net outstanding on the 6.18%, 2024 paper is currently at 278.74 bln rupees.

 

The Centre has offered to switch 250 bln rupees of the 7.35%, 2024 bond, the 8.40%, 2024 bond, and the 9.15%, 2024 bond with the 6.18%, 2024 bond.

Market participants believe that papers offered to be exchanged with 6.18%, 2024 bond might have been held in the held-to-maturity segment of some portfolios and would allow banks to reduce holdings of such bonds and in return would get an on-the-run paper. These high-yielding papers are difficult for bond traders to sell. 

 

“If a bank tries to sell the 9.15%, 2024 bond, no one is going to buy that bond but through this switch operation, people will be able to get rid of these papers from perhaps their HTM (held-to-maturity) books and in return get an on-the-run paper which is much easier to trade,” a dealer with a private bank said. 

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a band of 6.35-6.40% for the rest of the day. (Suyash Pande)


India Gilts: Lower on rise in crude prices, switch operation on Mon

 

  0950 IST   PRICE HIGH PRICE LOW OPEN PREVIOUS
6.45%, 2029
PRICE (rupees) 100.40 100.48 100.35 100.45 100.44
YTM (%)       6.3931 6.3812 6.3994 6.3854 6.3864

 

NEW DELHI–0950 IST–Government bond prices were down because an overnight rise in crude oil prices weakened appetite for dated securities, dealers said.

 

On Wednesday, crude oil futures for April delivery on the New York Mercantile Exchange rose over 2% or $1.20 to settle at $53.49 per barrel, as against $52.29 at the previous close. The contract was last at $53.56. 

 

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

 

“The crude has risen sharply on Wednesday which has to fall in bond prices but it is likely to remain range bound as nobody would be willing carry forward during the three-day holiday,” a dealer with a private bank said.

 

“Now that the remaining switch operation has been announced we see that 6.18%, 2024 and 7.57%, 2033 bonds are the worst hit today since these papers are being used for the switch operation on Monday,” the dealer added. 

 

The government has offered to switch 120 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, the 8.27%, 2020 bond, the 8.12%, 2020 bond, and the 7.00%, 2021 bond with the 7.57%, 2033 bond. It has also offered to switch 250 bln rupees of the 7.35%, 2024 bond, the 8.40%, 2024 bond, and the 9.15%, 2024 bond with the 6.18%, 2024 bond.

 

The Centre has already conducted switches totalling 1.28 trln rupees this financial year, higher than the budgeted target of 500 bln rupees. The government has revised the target for gilt switches in 2019-20 (Apr-Mar) to 1.65 trln rupees.

 

In a switch operation, the government issues long-term bonds in lieu of short-term papers, effectively postponing debt repayments.

 

Moreover, traders opted for caution ahead of the release of the minutes of Reserve Bank of India’s Monetary Policy Committee meet from Feb 4 to Feb 6 to gauge the view of individual policymakers, dealers said.

 

Yield on the 10-year benchmark is seen in a band of 6.38-6.43% during the day, dealers said.  (Vaibhav Chakraborty) 


India Gilts: Seen down as crude prices rise, switch operation Mon

 

NEW DELHI – Government bond prices are likely to open down as appetite for dated securities may be dented because of a sharp overnight rise in crude oil prices.

 

Crude oil futures for April delivery on the New York Mercantile Exchange rose by more than 2% or $1.20 on Wednesday to settle at $53.49 per barrel as against the previous close of $52.29. 

 

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

 

The 7.57%, 2033 and 6.18%, 2024 bond may underperform as the supply of the papers is expected to rise due to the 370-bln-rupee switch operation on Monday.

 

The government has offered to switch 120 bln rupees of the 6.65%, 2020 bond, the 7.80%, 2020 bond, the 8.27%, 2020 bond, the 8.12%, 2020 bond, and the 7.00%, 2021 bond with the 7.57%, 2033 bond. It has also offered to switch 250 bln rupees of the 7.35%, 2024 bond, the 8.40%, 2024 bond, and the 9.15%, 2024 bond with the 6.18%, 2024 bond.

 

The Centre has already conducted 1.28 trln rupees worth of switches this financial year, higher than the budgeted target of 500 bln rupees. The government has revised the target for gilt switches in 2019-20 (Apr-Mar) to 1.65 trln rupees.

 

In a switch operation, the government issues long-term bonds in lieu of short-term papers, effectively postponing debt repayments.

 

The fall in prices is likely to be exacerbated due to thin volumes, as market participation is likely to low ahead of a trading holiday on Friday. Money markets will remain closed on Friday on account of Maha Shivratri.

 

Moreover, traders may also opt to remain on the sidelines ahead of the release of the minutes of the Feb 4-6 RBI’s Monetary Policy Committee meet to assess the view of individual policy-makers.  

 

Yield on the 10-year benchmark is seen in a band of 6.38-6.43% as against 6.39% at close on Tuesday. Money markets were closed on Wednesday on account of Chhatrapati Shivaji Maharaj Jayanti.  (Vaibhav Chakraborty) 

 

End

 

US$1 = 71.64 rupees  (at 1700 IST)

 

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

 

Edited by Mainak Moitra

 

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