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India Gilts Review:Steady as mkt cautious on uncertainty over Omicron

Informist, Monday, Nov 29, 2021

 

By Vaibhav Chakraborty

 

NEW DELHI – Government bonds ended steady today because of market caution due to the uncertainty over the impact of the new strain of COVID-19 called Omicron and the impact it may have on global economic recovery, dealers said.

 

The detection of the new variant had sent shock waves across the global financial markets on Friday, as investors were quick to dump riskier assets and sought the shelter of haven asset such as bonds, dealers said.

 

The US yields witnessed its steepest fall since the onset of the pandemic in early 2020 because investors were quick to unwind their bets on an accelerated tapering of monetary stimulus by the Federal Reserve amid inflation being at a three-decade high, dealers said. Yield on the 10-year benchmark bond had slumped 16 basis points to settle at 1.48% on Friday.

 

Meanwhile, crude oil prices tanked over 10% on Friday because investors were concerned over the demand outlook for the fuel, which could be hit if countries decide to impose restriction on movement of public, goods and services, dealers said.

 

Moreover, the decision of the EU, the UK, Australia, and the US to enforce restrictions on people travelling from southern Africa, also weighed on the demand outlook, dealers said. 

 

The World Health Organization, on Friday, designated the new strain as a “variant of concern” and named it Omicron. Based on the preliminary evidence there is an increased risk of re-infection with this variant.

 

“A lot of the risk-off trade globally on Friday was seen overdone by many, and we saw today that the US yields and crude also bounced back from the low’s,” a dealer with a private bank said. “My sense is that there would be some caution exercised until there is more clarity on the impact of virus and how will the central banks react to it,” the dealer added.   

However, investors were of the view globally that the initial reaction to the new strain of virus was overdone across the world and was exacerbated by the low trade volumes in European and the US markets due to an extended weekend on account of Thanksgiving, dealers said.

 

The US Treasury yields and the crude oil prices have bounced back from the low’s touched on Friday, as investors remain cautious amid conflicting information over the impact of new virus, dealers said.

 

Experts at vaccine makers Pfizer and BioNTech said that they were not sure whether their existing vaccines would work against Omicron, but were hopeful of developing a new vaccine against the strain in 100 days. Moderna chief medical officer said a reformulated shot to combat the new strain could be available early in the new year.

 

Meanwhile, the doctor from South Africa who first detected the new strain suggested on Sunday that the patients suspected of having the new variant had only shown mild symptoms and recovered fully without hospitalisation.

 

Amid uncertainty, traders are unsure over the path of monetary policy that the central banks are likely to adopt in the near-term, dealers said. The central banks would be faced with the dilemma to either remain in an accommodative stance to tide over any risk to economy due to the new strain or accelerate tapering their monetary policy stimulus to curb the rising inflation, dealers said.

 

“People are going in with more caution as taking a position on either side could hurt your books, so what RBI does in December will be crucial, and my sense is that they would hold onto the rates and see how things will be impacted by omicron,” a dealer with a primary dealership said.

 

The Reserve Bank of India will detail its monetary policy statement on Dec 8, market will watch closely on the guidance that central bank will provide on the economic risks due to Omicron and also the near term interest rates, dealers said.

 

Before the new variant spooked the market’s view on economic recovery, they were pricing in at least a 25-basis-point reverse repo rate hike in December, dealers said. That may change if there is a risk to global economic growth due to the new strain, dealers said.

 

According to data on the RBI’s Negotiated Dealing System – Order Matching platform, the market-wide turnover was 220.80 bln rupees, against 414.60 bln rupees on Friday.

 

OUTLOOK

Government bonds may open steady on Tuesday as traders may keep to the sidelines in the run-up to the RBI’s next policy review meet from Dec 6-8.

 

Traders may also refrain from placing large bets on lack of significant domestic cues and the recent volatility.

 

The likelihood that central banks may remain accommodative for longer on fears of the new COVID-19 strain disrupting the nascent economic growth, could support gilts prices.

 

Any sharp movement in crude oil prices might also lend cues at open.

 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.35%.

 

 

Today 

Friday

Price

Yield

Price

Yield

5.63%, 2026

 99.8725

 5.6614%

 99.8975

 5.6548%

5.74%, 2026

 100.1400

 5.7065%

 100.0800

 5.7206%

6.64%, 2035 98.9200 6.7625% 98.9300 6.7613%6.67%, 2035

 99.3700

 6.7401%

 99.3800

 6.7390%

6.10%, 2031 98.3175 6.3351% 98.3500 6.3304%

India Gilts: In thin band; mkt cautious on uncertainty over Omicron

 

 1450 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.327598.400098.270098.400098.3500YTM (%)      6.33376.32346.34186.32346.3304

 

NEW DELHI–1450 IST–Government bonds were in a narrow range because traders refrained from placing large bets amid uncertainty over the impact of the new-found strain of COVID-19 called Omicron, dealers said.

 

The detection of the new strain has led to fears of economic disruptions as countries quickly moved to impose travel restrictions to curb its spread, with the US Treasury yields and crude oil prices plummeting on Friday, dealers said.

 

Since then, the World Health Organization has labelled Omicron as a “variant of concern,” while initial reports suggested that the there is an increase risk of reinfection, dealers said.   

 

“The market is still trying to understand how things are going to pan out in terms of the impact of new virus (strain), as initially reaction was that it is highly contagious, however, now reports suggest that it is not as harmful as was thought earlier,” a dealer with a private bank said.

 

“US yields and crude oil have also come back from the lows, so people will wait out to see how this is going to impact the decision making of the central banks,” the dealer added.

 

However, South African authorities, which had raised the alarm over Omicron, on Sunday said that patients suspected of having the new variant had only shown mild symptoms and recovered fully without hospitalisation.

 

Amid contrasting reports, the market is unsure if central banks would wait for more information before taking a call on policy normalisation, or accelerate the pace of monetary policy unwinding amid rising inflation, dealers said.

 

With the Reserve Bank of India set to deliver a crucial policy on Dec 8, traders expect government bonds to move in a narrow range until there is more clarity over the new strain and near term view on interest rates, dealers said. 

 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.35%.  (Vaibhav Chakraborty)

India Gilts: Tad down; rebound in crude, US ylds offsets Fri fall

 

 1110 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.320098.400098.270098.400098.3500YTM (%)      6.33486.32346.34186.32346.3304

NEW DELHI–1110 IST–Government bonds were slightly down as a rebound in crude oil prices and US Treasury yields led traders to trim their gilt holdings anticipating a sharp recovery in both the markets after they plunged on Friday.

 

Brent crude futures for January plunged 11.6% on Friday to settle at $72.22 per barrel but rose past the key $75 per bbl mark today. Meanwhile, the yield on the benchmark 10-year US Treasury note fell 16 basis points on Friday to 1.48% but recovered to 1.54% today.

 

Traders chose to keep their gilt portfolios light as they awaited further details on the new strain of coronavirus, Omicron, which was identified last week. While medical experts from South Africa, where Omicron was first detected, termed the new variant as “mild”, the World Health Organization termed it a ‘variant of concern’ on Friday.

 

While the travel restrictions imposed by several countries led to a knee-jerk reaction in global markets, dealers were of the view that they would recover quickly if the new strain does not lead to a surge in cases, thereby limiting the effect on the economic growth.

 

“Market looks to be more forward-looking right now instead of thinking about the fall, it looks like Brent (crude oil futures) will recover if the new strain blows over, and then the market will start thinking of (policy) normalisation again,” a dealer at a state-owned bank said. 

 

A move towards a risk-off environment also dampened demand from foreign investors for domestic gilts, in spite of the increased interest rate differential due to the fall in US Treasury yields, dealers said.

 

Further, some traders avoided large bets due to caution ahead of the Reserve Bank of India’s policy review next week, dealers said.

 

The central bank was seen continuing with its accommodative policy stance but traders were split on whether it would hold off on hiking the reverse repo rate this month in the face of a fresh surge in COVID infections globally as it moves towards normalising pandemic-related emergency measures, dealers said.

 

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

India Gilts: Seen up; crude, US ylds plunge Fri on COVID variant fears

 

NEW DELHI – Government bonds are seen opening sharply up due to a slump in crude oil prices and US Treasury yields over the weekend as a new strain of coronavirus detected in South Africa dented the near-term economic growth outlook, dealers said.

 

The World Health Organization named the new variant as ‘Omicron’ and designated it as a ‘Variant of Concern’ on Friday. As many countries imposed a fresh round of mobility restrictions, investors globally stocked up on haven assets, including US Treasury bills.

 

Further, yields on US Treasury bills fell sharply on the view that the pace of unwinding of monetary policy accommodation by central banks may decrease due to the expected slowdown of nascent growth impulses in the global economy. Yield on the benchmark 10-year US Treasury note plunged 16 basis points on Friday.

 

A fall in US Treasury yields widens the interest rate differential between the safe-haven asset and emerging market debt, making the latter more appealing for foreign investors.

 

Crude oil prices also slumped as the outlook for demand was derailed by mobility restrictions, along with concerns of the new variant’s spread even as Europe grapples with a surge in infections that may lead to lockdowns being imposed in several countries. 

 

Brent crude futures for January plunged 11.6% on Friday to settle at $72.22 per barrel after starting the day north of the psychologically-crucial $80 per bbl. Typically, a fall in crude oil prices reduces risks of imported inflation in India as the country is a major importer of the fuel and provides more room for the Reserve Bank of India to prolong its monetary policy accommodation.

 

In Asian trade today, both measures rebounded as some traders bet that the caution over the new variant was overblown, but levels remained well below Thursday’s close. Sentiment remains strong that monetary policy will remain benign on the domestic front, in the run-up to the RBI’s next policy review on Dec 6-8, dealers said.

 

The RBI’s Monetary Policy Committee is expected to stay put on rates, including the reverse repo rate, which was earlier expected to be hiked at its December meet, due to caution over the evolving global outlook as well as to support economic growth, dealers said.

 

However, the recent volatility in global cues may keep some traders on the sidelines as they wait for the market to consolidate, dealers said.

 

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.27-6.35%.  (Aaryan Khanna)

End

 

US$1 = 75.10 rupees

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

 

Edited by Maheswaran Parameswaran

 

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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