India Gilts Review: Fall on lack of OMO notice, surge in oil prices

Informist, Friday, Oct 22, 2021

 

By Nikhil Patwardhan

 

MUMBAI – Government bonds ended lower today because dealers trimmed their gilt holdings as the Reserve Bank of India refrained from announcing any open market operations. Dealers had expected the central bank to announce a special open market operation on Thursday after market hours to cap rising yields.

 

A special open market operation, also known as Operation Twist, entails simultaneous purchase and sale of gilts of the same quantum. Typically, the central bank buys longer-maturity papers and sells shorter-maturity ones to anchor yields on long-term gilts.

Dealers had covered their recent short positions earlier in the week, anticipating the RBI would cap the recent rise in yields through open market operations. Moreover, some dealers had stocked up the 10-year benchmark 6.10%, 2031 gilt to sell it to the RBI at a higher price at the auction.

 

However, with the RBI not announcing any open market operation, dealers offloaded some stock.

 

The 6.10%, 2031 along with the 6.67%, 2035 papers were likely candidates for the open market operation, and dealers expected the central bank to send strong signals by the cutoffs that it sets at the open market purchase auctions. The two papers were the worst hit among on-the-run papers today.

 

Meanwhile, after having fallen sharply on Thursday, crude oil prices gained intraday today, which further weighed on gilts. The Brent crude oil futures contract for December delivery topped the psychologically-crucial mark of $85 a barrel again.

 

Crude oil prices had fallen sharply on Thursday after the US National Oceanic and Atmospheric Authority forecast a mild winter in the US, particular in the south and east of the country, hurting the outlook for oil demand in the coming months. 

 

High crude oil prices lead to a higher import bill for India, the world’s third-largest consumer of crude oil, thus leading to elevated inflation and giving the RBI less room to extend its policy accommodation.

 

An overnight rise in US Treasury yields, too, weighed on gilts, dealers said. The yield on the 10-year benchmark US Treasury note rose further to a fresh five-month high due to concerns that the US Federal Reserve would ramp up its policy tightening as inflation from energy and input costs were expected to soar. 

 

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 for foreign investors.

 

“The rise in (Brent crude oil December futures) crude today again to $85 suggests that the oil prices will remain elevated even if we see some bouts of profit booking,” said a dealer with a private bank.

 

“US Treasury yield, too, is well above 1.60% so all these global factors are pushing yields higher. But, demand seems decent at the auction at current levels, so the auctions are sailing through, may also be partially on hope that the RBI would intervene. But if the RBI doesn’t, from here on, the market may continue demanding higher yields. Today also because there wasn’t any OMO announcement, we saw the sell-off.”

 

Meanwhile, at the 240-bln-rupee weekly gilt sale auction today, the central bank set slightly higher-than-expected cutoff prices for the four papers it auctioned, which indicated firm demand for gilts.

 

The government raised 20 bln rupees through the 4.26%, 2023 bond; 60 bln rupees through the 5.63%, 2026 bond, 90 bln rupees through the 6.67%, 2035 bond; and 70 bln rupees through the 6.67%, 2050 bond.  

 

While the two-most traded gilts among the four–the 5.63%, 2026 and the 6.67%, 2035–had come slightly off lows as a reaction to the auction result, the sharp rise in crude oil prices weighed, and prompted dealers to trim their holdings.

 

Some sections of the market also offloaded some stock in a bid to go light ahead of the release of the minutes of RBI’s latest monetary policy meeting which will be out later today. Comments on inflation of members of the Monetary Policy Committee would be keenly monitored by the market, dealers said. 

 

Today, the 10-year benchmark 6.10%, 2031 bond ended at 98.10 rupees or 6.36% yield, against 98.28 rupees or 6.34% yield on Thursday.

According to data on the RBI’s Negotiated Dealing System – Order Matching Platform, the market-wide turnover was 326.45 bln rupees today, against 393.52 bln rupees on Thursday.

 

OUTLOOK

On Monday, gilts may take cues from the minutes of the RBI’s latest monetary policy review meeting which will be out later today. Gilts are not traded on Saturday.

 

Dealers may avoid aggressive bets due to the recent volatility.

 

Some dealers expect the RBI to announce a simultaneous purchase and sale on Monday, which may prompt dealers to buy the 10-year gilt, which is likely to be included in the RBI’s gilt buy auction, to sell it at a higher price at the auction. However, some dealers may exercise some caution ahead of the 6.10%, 2031 gilt’s likely auction next week.

 

Any sharp movement in US Treasury yields and crude oil prices over the weekend may guide domestic bonds in early trade.

 

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.40% on Monday.    

 

 

TODAY 

Thursday

Price

Yield

Price

Yield

5.63%, 2026

 99.5950

 5.7334%

 99.6700

 5.7141%

6.64%, 2035

 98.1050

 6.8547%

 98.3300

 6.8287%

6.67%, 2035 98.4200 6.8466% 98.6000 6.8264%

5.85%, 2030

 96.8000

 6.3167%

 96.7000

 6.3309%

6.10%, 2031 98.0975 6.3640% 98.2275 6.3384%

 

India Gilts: 6.67%, 2035 recoups losses on firm demand at auction

 

 1430 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.250098.290098.140098.155098.2775YTM (%)      6.34246.33686.35806.35586.3384

 

 1430 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.67%, 2035PRICE (rupees)98.580098.600098.350098.350098.6000YTM (%)      6.82866.82646.85456.85456.8264

 

India Gilts: 6.67%, 2035 recoups losses on firm demand at auction

 

NEW DELHI–1430 IST–The 6.67%, 2035 bond recouped all losses because traders stepped up purchases after the Reserve Bank of India set a higher-than-expected cut-off price for the bond at the weekly gilt auction today.

 

Investors who lost out on the gilt at the auction paid a premium to stock up on the 6.67%, 2035 paper in the secondary market. The RBI set the cut-off price for the 6.67%, 2035 bond at 98.40 rupees, against the 98.30-rupee median of an Informist poll of 16 gilt dealers.

 

“Demand was good, I think it was mutual funds aiming for both liquid gilts and particularly the 14-year paper, so it rose steadily after the auction ended (at 1130 IST) and then jumped after (the) result,” said a dealer at a private sector bank.

 

Prior to the auction, the bond had lagged its peers, down 25 paise at the day’s low from its Thursday close. However, after traders speculated that demand for the gilt at the auction was firm, the bond recovered some losses.

 

Meanwhile, other gilts traded in a thin band after the cut-off for the three other gilts at the 240-bln-rupee auction came along expected lines, dealers said.

 

The yield on the 10-year benchmark 6.10%, 2031 bond is seen within the band of 6.31-6.37% today.  (Aaryan Khanna)

India Gilts: In thin band ahead of 240-bln-rupee debt sale result

 

 1300 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.240098.290098.140098.155098.2775YTM (%)      6.34396.33686.35806.35586.3384

 

MUMBAI–1300 IST–Government bonds were confined to a narrow band and trade volume was low because dealers avoided large bets ahead of the result of the 240-bln-rupee weekly gilt sale.

 

The result of the auction would be closely monitored by the market as the government has auctioned two of the most-traded papers across the yield curve — the 5.63%, 2026 gilt and the 6.67%, 2035 gilt. The cutoff set by the Reserve Bank of India on the 5.63%, 2026 gilt will suggest where the central bank wants yields on five-year gilts in the near-term to be, dealers said, as this might be the last auction of the paper and the Centre may issue a new five-year gilt soon.

 

Typically, the Centre issues a new similar-maturity security after total outstanding amount of the existing security hits 1.2 trln rupees. However, of late, the Centre has increased this limit to 1.5 trln rupees as, some dealers believe, the government only issued new similar-maturity securities after the outstanding stock of the 6.64%, 2035 gilt and the floating rate bond 2033 came close to 1.5 trln.

 

“Given the current global scenario, today’s and the next week’s auction would be closely watched to see where the RBI’s comfort levels lie,” said a dealer with a primary dealership.

 

“There will be a new five-year gilt issued, so today’s cutoff might suggest where the coupon on the new gilt would be, especially given that the quantum is low in the second-half. The 14-year gilt has been among the worst-hit since policy, so again, the cutoff set on the paper attains significance there. I believe along with OT/OMOs (operation twists, open market operations) the auction results would be closely watched by the market to take direct cues from the RBI.”

 

The market expected the central bank to announce a special open market operation on Thursday in a bid to cap the recent rise in yields. However, the RBI did not announce one, because of which prices fell at open.

 

However, bonds came off lows as dealers took comfort from a fall in crude oil prices. The December futures contract of Brent crude oil fell more than $1 on Thursday to settle at $84.61 per barrel. Today, the contract declined further to around $84.32/bbl, comfortably below the psychologically-crucial mark of $85 a bbl, which lent support to domestic bonds, dealers said.

 

Certain sections of the market now also expect the central bank to announce an open market operation on Monday, which limited losses, dealers said.

 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.37% today.  (Nikhil Patwardhan)

India Gilts: Fall on lack of special OMO notice; debt sale result eyed

 1030 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.210098.217598.140098.155098.2775YTM (%)      6.34816.34706.35806.35586.3384

 

India Gilts: Fall on lack of special OMO notice; debt sale result eyed

 

NEW DELHI–1030 IST–Government bonds, particularly those of longer maturities, fell as the Reserve Bank of India did not announce a special open market operation after market hours on Thursday, which was widely anticipated by the market.

 

A special open market operation, also known as Operation Twist, entails simultaneous purchase and sale of gilts of similar quantum to remain liquidity-neutral. Typically, the central bank buys longer-maturity papers and sells shorter-maturity papers to anchor yields on long-term gilts.

 

Traders expected a quantum of 100-200 bln rupees to be announced at the operation. Lacking the RBI’s support, traders trimmed holdings to make room for the fresh supply at the weekly gilt auction today.

 

Moreover, a rise in US Treasury yields also weighed on gilts. Traders were unwilling to step up gilt purchases as the US Federal Reserve is expected to begin tapering its asset purchases at the next monetary policy meeting on Nov 2-3.

 

“The lack of open market operation will bite, considering the gains over the last two days, and with US Treasury (yields) up to 1.68% (for the 10-year note) I’m not going to pick up stock before the auction,” a dealer at a private bank said.

 

Losses were somewhat limited as the Brent crude oil futures contract for December delivery fell 1.4% at settlement on Thursday. The contract was near the $84-per-barrel mark in Asian trade today, which eased fears of higher inflation in India.

 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.37% today.  (Aaryan Khanna)

India Gilts: Seen down due to lack of special OMOs; debt sale eyed

 

NEW DELHI – Government bonds are seen opening slightly lower after the Reserve Bank of India did not announce special open market operation, as widely-anticipated, after market hours on Thursday.

 

Traders had stepped up purchases in gilts, particularly those of longer-maturities, over the last two days in the hope of offloading the stock to the RBI at the gilt purchase, which was seen at 100-200 bln rupees.

 

With the RBI refraining from announcing the operation, gilts may give up some gains made over the last two days, dealers said.

 

Traders may also trim holdings ahead of the result of the 240-bln-rupee weekly gilt auction today. The government has offered to sell 20 bln rupees of the 4.26%, 2023 bond, 60 bln rupees of the 5.63%, 2026 gilt, 90 bln rupees of the 6.67%, 2035 bond, and 70 bln rupees of the 6.67%, 2050 bond.

 

While gilt prices may fall, the auction is likely to sail through with no devolvement on underwriters expected by dealers. Underwriting fee cut-off estimates for all gilts at auction today were lower than those at the auction for the same bonds on Oct 8.

 

A higher fee indicates concern that the RBI may devolve a particular gilt partly or wholly on underwriters.

 

On the global front, the yield on the 10-year US Treasury note rose by 3 basis points to 1.68% on Thursday, which may weigh on domestic gilts, dealers said. 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.

 

However, crude prices plunged on Thursday after the US National Oceanic and Atmospheric Authority forecast a mild winter in the US, particular in the south and east of the country, hurting the outlook for oil demand in the coming months. 

 

Brent crude oil futures reversed from three-year highs for the December contract, settling lower by $1.21 at $84.61 per bbl on Thursday, and fell further to $84.23 per bbl in Asian trade today. Typically, a fall in crude oil prices decreases upside risks to inflation in India and gives more room to the RBI to prolong its monetary policy accommodation.

 

Further, some traders speculated inflows in mutual fund debt schemes and expected gilt purchases from long-term investors to cap any sharp rise in yield early in the day, dealers said.

 

According to data available on the Clearing Corp of India, mutual funds net bought 30.18 bln rupees of gilts on Wednesday and Thursday.

 

Traders may avoid large bets ahead of the minutes of the RBI’s October Monetary Policy Committee meeting, scheduled for release today, dealers said.

 

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.36% today. (Aaryan Khanna)

End

 

US$1 = 74.89 rupees

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

 

Edited by Shirsha Thakur

 

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