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India Gilts Review: Fall; traders limit exposure to US FOMC outcome

Informist, Wednesday, Dec 15, 2021

 

By Aaryan Khanna

 

NEW DELHI – Government bonds ended slightly lower as traders trimmed holdings, expecting the US Federal Open Market Committee to quicken the pace of tapering the Federal Reserve’s asset purchases at the outcome of its meeting today, dealers said.

 

Today, the 10-year benchmark 6.10%, 2031 bond ended at 98.12 rupees or 6.36% yield, against 98.18 rupees or 6.36% on Tuesday.

 

While gilts traded in a narrow range for most of the day, traders moved to limit their exposure to the Fed’s decision towards the close of trade, dealers said.

 

The winding up of the Fed’s asset purchases was seen as a key marker for when the FOMC would hike interest rates to tackle surging inflation in the world’s largest economy, with an accelerated taper pushing the hike closer.

 

The US central bank would reduce its $120-bln-a-month purchases by $15 bln monthly, putting it on pace to wind up the programme by June, the FOMC had decided at its previous meeting in November.

 

In addition to the FOMC meeting outcome, dealers also eyed the outlook for growth and inflation that policymakers would release along with their decision.

 

Fed Chair Jerome Powell had suggested that it might be time for the Fed to drop the word “transitory” to describe the nature of the current inflation trajectory, and that the US central bank could consider accelerating its asset-purchase-taper to tame rising inflation.

 

Meanwhile, a recent fall in crude oil prices, after the International Energy Agency said that the fast-spreading Omicron variant of coronavirus is likely to dent economic recovery and weaken the demand outlook for the commodity, failed to lend support to gilts today, dealers said.

 

Brent crude oil futures for February delivery slipped close to 2% since Monday and were at $73.06/bbl at the end of Indian market hours. A fall in crude prices eases concerns about imported inflation for major importing countries like India, and gives room to the Reserve Bank of India to prolong its accommodative monetary policy. 

 

“A fall in crude won’t matter so much when the FOMC decides it wants to wrap up its asset purchases and starts thinking of raising rates early next year instead of June,” a dealer at a mutual fund house said.

 

However, some traders avoided large bets expecting the FOMC to indicate a quicker taper without accelerating the pace at the current meeting in the face of a potential hit to economic growth from the fast-spreading Omicron variant of COVID-19, dealers said.

 

Additionally, with the yield on the 10-year US Treasury note steady at around 1.45%, dealers pointed out that global investors also avoided trimming their portfolios sharply ahead of the Fed’s decision. 

 

Further, traders kept to the sidelines ahead of the policy outcomes of other key central banks, including the European Central Bank, Bank of England, and Bank of Japan later this week, dealers said.

 

“The US FOMC decision will be on the same lines as last policy,” a dealer at a private bank said. “(We’re) not expecting any addition in tapering right now.”

 

Meanwhile, yields on short-term gilts rose more than those on longer-maturing bonds after the RBI set the cut-off yields at the 200-bln-rupee Treasury bill auction slightly higher than expected. However, the rise in cut-off yields was likely to be temporary and caused by lack of participation from mutual funds, dealers said.

 

While the cut-off yields on the 91-day and 364-day T-bills were 1-2 bps above the market’s expectations, the RBI set the cut-off yield on the 182-day T-bill at 3.88%, against an estimate of 3.83% in a poll of 17 dealers by Informist.

 

According to data on the RBI’s Negotiated Dealing System – Order Matching platform, the market-wide turnover today was 140.15 bln rupees against 137.20 bln rupees on Tuesday.

 

OUTLOOK

On Thursday, government bonds may take cues from the outcome of the US FOMC meeting, due later today.

 

Further, traders may keep to the sidelines ahead of the policy outcomes of the European Central Bank, the Bank of England and the Bank of Japan later this week.

 

The pace of unwinding monetary policy accommodation in the face of surging inflation globally may determine the direction gilts take amid lack of domestic cues, dealers said.

 

Any sharp movement in US Treasury yields and crude oil prices might also lend cues at open.

 

On Thursday, the yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.40%.

 

 

Today 

Tuesday

Price

Yield

Price

Yield

5.63%, 2026

 99.7500

 5.6937%

 99.8025

 5.6798%

5.74%, 2026

 100.0300

 5.7315%

 100.1125

 5.7121%

6.64%, 2035 98.7900 6.7782% 98.8500 6.7713%6.67%, 2035

 99.1600

 6.7637%

 99.2200

 6.7570%

6.10%, 2031 98.1200 6.3644% 98.1800 6.3558%

India Gilts: In thin band amid muted volumes ahead of FOMC outcome

 

 1440 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.140098.200098.100098.200098.1800YTM (%)      6.36166.35306.36736.35306.3558

 

NEW DELHI–1440 IST–Government bonds traded in a thin band as traders kept to the sidelines awaiting cues from the outcome of the US Federal Open Market Committee’s meeting, due after market hours today, dealers said.

 

The key FOMC decision is expected to accelerate the tapering of the US Federal Reserve’s asset purchases, with rate hikes expected when the programme ends. A quicker pace of tapering would push up the timeline for a rise in rates, dealers said.

 

Fed Chair Jerome Powell had suggested that it might be time for the Fed to drop the “transitory” phrase to describe the nature of the current inflation trajectory, and that the central bank could consider accelerating its asset purchase tapering to tame rising inflation in the world’s largest economy.

 

CPI inflation in the US hit a four-decade high of 6.8% in November after a print of 6.2% in October, which was the highest in three decades.

 

“There’s no incentive to buy since Powell had already indicated a faster taper, so it’s quite surprising to see US yields under 1.45% (on the 10-year Treasury note) when accommodation will be taken out, but domestic market isn’t trading on that,” a dealer at a private bank said.

 

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.33-6.38%.  (Aaryan Khanna)

India Gilts:Steady as traders cautious ahead of US FOMC outcome 

 

 1030 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.10%, 2031PRICE (rupees)98.180098.200098.100098.200098.1800YTM (%)      6.35596.35306.36736.35306.3558

 

NEW DELHI– 1030 IST–Government bonds were steady because traders were cautious ahead of the outcome of the US Federal Open Market Committee’s policy meet today, which could set the course for interest rates in the near-term, dealers said. 

 

The US central bank is expected to expedite the tapering of its asset purchase and wrap it up by the end of March, thereby, strengthening the case for eventual rate hikes in 2022. 

 

Traders expect the outcome of the ongoing FOMC meet to mark the beginning of a shift away from the ultra low-interest rate regime and growth focused monetary policy towards an inflation targeting environment, dealers said.

 

“Not much happening today, don’t see any significant action as traders are not interested to be on the either side of the trade ahead of FOMC,” a dealer with a state-owned bank said. “Even though market is aware of an accelerated pace unwinding the Fed is likely to adapt but what will also be crucial is the course of monetary policy it is likely to take going forward,” the dealer said

 

Meanwhile, traders also refrained from placing large bets ahead of the crucial monetary policy meetings of other key central banks such as the European Central Bank, Bank of England, and Bank of Japan, among many others this week.

 

Market expects government bonds to remain in a narrow range for most part of the day, but some traders may look to trim their bond holdings towards the fag-end largely to limit exposure on their bond portfolios ahead of key central bank meets, dealers said. 

 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.33-6.38%.  (Vaibhav Chakraborty)

India Gilts: Seen steady on caution ahead of US FOMC outcome today

 

NEW DELHI – Government bonds may open steady today because traders are likely to exercise caution ahead of the outcome of the US Federal Open Market Committee’s policy meet, due late in the evening today.

 

With the CPI inflation print for November climbing to a near four-decade high of 6.8% in the US, investors expect the Federal Reserve to accelerate the tapering of its asset purchases, setting the stage for an eventual liftoff in interest rates in 2022.

 

Analysts expect that the FOMC could wrap up its bond purchase programme by the end of March, which could lead to a hike in interest rates by June. 

 

Several US Fed officials, including Chair Jerome Powell, raised concerns over the elevated inflation and potential downside risks that it poses on the nascent economic recovery.

 

Moreover, investors will keenly await details over the growth projections and the course of policy normalisation that the US central bank is likely to embark on despite announcing its plan to taper asset purchases by $15 bln per month starting in November. The FOMC members may also drop the usage of the word “transitory” to define the current rise in inflation.   

 

Traders are also likely to exercise caution ahead of the crucial monetary policy meets of key central banks such as the European Central Bank, Bank of England, and Bank of Japan, among many others this week.

 

Meanwhile, a fall in the crude oil prices since Tuesday may lend support to government bonds today as the International Energy Agency said that the fast-spreading Omicron variant of coronavirus is likely to dent economic recovery and weaken demand outlook for the fuel.

 

Brent crude oil futures for January delivery slipped close to 2% since Tuesday and were last at $72.92 per barrel. A fall in crude prices eases concerns over imported inflation for major importing countries like India, and gives room to the Reserve Bank of India to prolong its accommodative monetary policy. 

 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.33-6.38%.  (Vaibhav Chakraborty)

 

End

 

US$1 = 76.23 rupees

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

 

Edited by Avishek Dutta

 

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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