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Tuesday, December 7, 2021

India Gilts Review: Up as RBI seen capping ylds; crude prices weigh

Informist, Monday, Oct 25, 2021

 

By Nikhil Patwardhan

 

MUMBAI – Government bonds ended higher today because dealers were hopeful that the Reserve Bank of India would soon intervene in the market to cap rising yields by announcing a special open market operation. Longer-maturity gilts, which most likely will be included in the central bank’s open market operation, thus outperformed short-term bonds. 

 

The 10-year benchmark 6.10%, 2031 bond ended at 98.20 rupees or 6.35% yield, against 98.10 rupees or 6.36% yield on Friday.

 

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.

 

Gilts had fallen on Friday after the RBI did not announce an open market operation after market hours the previous day. Most dealers had anticipated the central bank to announce one in a bid to cap the recent rise in yields. Traders, thus had gone short due to the lack of RBI intervention, but hope that the central bank will soon announce an open market operation prompted them to cover their short positions today, dealers said.

 

“An OMO (open market operation) or an OT (Operation Twist) is due for sure and they (RBI) have announced it (open market operation) on a Monday before,” said a dealer with a private bank.

 

“So on Friday, I guess it was more like an immediate reaction to the RBI refraining from announcing any open market operation, against the market’s expectations. Today there were renewed hopes that the RBI would announce an OMO after market hours, so some short-covering to start with and then some stocking up at these levels to sell it back to RBI at high price at the OMO,” said the dealer.

 

However, gains were limited due to a sharp rise in crude oil prices. The Brent crude oil December futures contract rose above the psychologically-crucial mark of $85-a-barrel and settled at $85.53/bbl on the back of easing travel restrictions. Data from Baker Hughes on Friday also suggested a potential decline in oil production.

 

Today, the contract rose further by nearly $1 and topped $86 a bbl, which weighed on gilts, dealers said. 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.

 

Moreover, the minutes of the Reserve Bank of India’s October monetary policy meeting, released after market hours on Friday, showed that members of the rate-setting panel are concerned about inflation in the near term due to a rise in global commodity prices.

 

While much of what was there in the latest minutes was already priced in bonds since the October policy address earlier this month, the minutes suggested that more members were now inclined towards thinking that the RBI should start considering a reverse repo rate hike sooner rather than later, which weighed on gilts today, especially short-term bonds, dealers said.

 

The most-traded five-year gilt, the 5.63%, 2026 paper, which has outperformed longer-tenure bonds in October so far, ended largely steady today. Trade in the paper, too, was low because dealers expect the Centre to issue a new five-year gilt soon, as the outstanding stock of the 5.63%, 2026 paper has topped 1.43 trln rupees.

 

Typically, the Centre issues a new similar-maturity security after total outstanding amount of an 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 rupees.

 

According to data on the RBI’s Negotiated Dealing System – Order Matching Platform, the market-wide turnover was 201.40 bln rupees today, against 326.45 bln rupees on Friday.

 

OUTLOOK

On Tuesday, gilts may take cues from any open market operation notice. If the central bank announces one for Thursday and includes the long-term bonds as most dealers expect, then the most-traded 10-year and 14-year bonds will rise, dealers said. 

 

Dealers may stock up these papers in a bid to sell it to the RBI at a higher price at the open market operation auction.

 

However, dealers may avoid aggressive bets due to the recent volatility. They 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 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 Tuesday.    

 

 

TODAY 

Friday

Price

Yield

Price

Yield

5.63%, 2026

 99.6400

 5.7218%

 99.5950

 5.7334%

6.64%, 2035

 98.2000

 6.8438%

 98.1050

 6.8547%

6.67%, 2035 98.5500 6.8320% 98.4200 6.8466%

5.85%, 2030

 96.8000

 6.3167%

 96.8000

 6.3167%

6.10%, 2031 98.1950 6.3503% 98.0975 6.3604%

 

India Gilts: Long-term bonds up, traders eye OMO notice; crude weighs

 1335 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.217598.330098.050098.100098.0975YTM (%)      6.34716.33126.37076.36376.3640

 

India Gilts: Long-term bonds up, traders eye OMO notice; crude weighs

 

NEW DELHI–1335 IST–Government bonds were confined to a thin band after a rise early in the day as traders covered short bets on the view that gilt prices would not fall further, dealers said.

 

Further, traders stocked up on long-term gilts anticipating an announcement from the Reserve Bank of India on an open market operation as early as this week to cap gilt yields, dealers said.

 

Moreover, the minutes of the Reserve Bank of India’s Monetary Policy Committee meet, released after hours on Friday, were not seen hinting at a quicker-than-expected normalisation of monetary policy accommodation, dealers said.

 

With the comments of policymakers priced in, gains were limited amid thin trade as traders kept to the sidelines due to a lack of significant domestic cues, dealers said.

 

“Shorts have covered and US Treasury yields are softer today, but otherwise there is no big market movement because crude is a constant worry,” a dealer at a private bank said.

 

On Friday, crude oil prices rose on the back of easing travel restrictions and reports of a potential decline in oil production. The Brent crude oil December futures contract settled at $85.53 per bbl on Friday, and rose further today to trade firmly above the psychologically-crucial $86-per-bbl mark.

 

High crude oil prices lead to a higher import bill for India, the world’s third-largest consumer of the commodity, leading to elevated inflation, which constrains the Reserve Bank of India from extending its policy accommodation.

 

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

India Gilts: Rise as traders cover short bets; OMO notice eyed

 

 1045 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.280098.330098.050098.100098.0975YTM (%)      6.33836.33126.37076.36376.3640

 

NEW DELHI–1045 IST–Government bonds rose because traders covered short bets, expecting gilt prices to remain in a narrow band after falling last week, dealers said.

 

Traders stepped up purchases as the yield on 10-year benchmark 6.10%, 2031 gilt topped the psychologically-crucial 6.37% mark, with no further rise likely. Further, the Reserve Bank of India was seen capping gilt yields by announcing a special open market operation as early as this week, dealers said.

 

A special open market operation, also known as ‘Operation Twist’, entails simultaneous purchase and sale of gilts of similar quantum to remain liquidity-neutral.

 

Some traders had also trimmed their holdings on Friday on concern that the minutes of the October Monetary Policy Committee meet would show members hinting at a faster-than-expected policy normalisation in the face of adverse global cues, including elevated US Treasury yields and crude oil prices, dealers said.

 

While policymakers did highlight global price pressures percolating to domestic inflation, the comments on policy seemed to indicate a gradual hike of rates, as highlighted by RBI Governor Shaktikanta Das in his address after the MPC meet on Oct 8.

 

“Traders went in very very light before minutes, and what we heard from there was quite standard, the comments seemed to be preparing the market for a reverse repo (rate) hike in December which has already been priced in,” a dealer at a state-owned bank said.

 

Meanwhile, traders will look for further cues from Governor Das’ address at the National Academy of Audit and Accounts today.

 

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

India Gilts: Seen down as MPC minutes hint at faster normalisation

 

MUMBAI – Government bonds are seen lower because the minutes of the Reserve Bank of India’s October monetary policy meeting, released after market hours on Friday, showed that members of the rate-setting panel are concerned about inflation in the near-term due to a rise in global commodity prices.

 

More members now think the RBI should start considering a reverse repo rate hike sooner rather than later, which will weigh on gilts, especially short-term bonds, dealers said.

 

While certain sections of the market expected the central bank to announce a hike in the reverse repo rate in the October policy itself, the RBI had refrained from doing so, which led to short-term gilts outperforming the longer-maturity ones so far this month. 

 

Yield on the most-traded five-year paper–5.63%, 2026 gilt–has risen just about 4 basis points compared to a 12 basis point rise in the 10-year benchmark 6.10%, 2031 gilt in October.

 

Some sections of the market had also expected the central bank to ramp up its liquidity management operations and hike the tenure of its variable rate reverse repo operations to even 56 days from 14, three, four, and seven days.

 

However, the central bank did not resort to hiking the tenure of its variable rate reverse repo operations either, which worked well for short-term gilts, dealers said.

 

Moreover, the discontinuation of its outright gilt purchases under the government securities acquisition programme that the central bank had started in April to anchor yields on papers, too, weighed on long-term gilts. 

 

The minutes of the MPC meeting show that members of the panel are worried about the recent uptick in global commodity prices led by crude oil, which will lead to higher inflation in the near-term, thus prompting the RBI to act sooner-than-anticipated.

 

Mridul Saggar, executive director of the RBI, said that high average crude oil prices can raise CPI inflation by 15-20 bps, adding that high average crude oil prices can lower growth by 13-15 bps.

 

“Some members’ comments are a shift from what we have been hearing for the last two months–global factors are watched but, decisions are made primarily based on domestic factors–which is a worry because suddenly now you have MPC members talking about adverse impact of global factors,” said a dealer with a primary dealership.

 

“While much of it (global factors) has already been priced in since the minutes, crude oil prices continue to rise which is a problem and I see impacting on gilts in the near-term, across the curve.”

 

The 10-year US Treasury yield has risen nearly 20 basis points in October, while crude oil prices have hit multi-month highs.

 

On Friday, crude oil prices rose on the back of easing travel restrictions. Data from Baker Hughes on Friday also suggested a potential decline in oil production. The Brent crude oil December futures contract rose above the psychologically-crucial $85-a-barrel level and settled at $85.53/bbl.

 

Today, the contract rose by nearly $1 and had topped $86 a bbl, which will weigh on gilts, dealers said as 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.

 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.40% today.  (Nikhil Patwardhan)

 

End

 

US$1 = 75.08 rupees

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

 

Edited by Vandana Hingorani

 

Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

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Source: Cogencis

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