Informist, Friday, Sep 24, 2021
By Aaryan Khanna
NEW DELHI – Government bonds slumped today, tracking an overnight jump in US Treasury yields, as investors worldwide got worried about a quicker-than-expected pace at which the US Federal Reserve projected a wind-down of its asset purchases.
The 10-year benchmark 6.10%, 2031 bond ended at 99.40 rupees or 6.18% yield, as against 99.70 rupees or 6.14% yield on Thursday.
US Treasury yields surged because the Fed indicated, after its latest policy meeting, that it envisaged a quicker-than-expected tapering of its asset purchases, as well as an earlier-than-expected hike in interest rates.
The yield on the 10-year benchmark US Treasury note, which had climbed 9 basis points to settle at a two-month high of 1.41% on Thursday, inched up to 1.42% at the close of Indian trading hours. 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.
Losses in the 10-year benchmark 6.10%, 2031 bond mounted as yield on the paper topped the psychologically-crucial 6.18% mark, triggering stop losses. Meanwhile, traders trimmed holdings of the 5.63% gilt as its yield rose past 5.65%.
The sharp fall in domestic bonds took some traders by surprise, as many had expected the surge in US yields to have a muted impact on domestic gilts, dealers said.
The fallout dealt a blow to investor appetite at the 310-bln-rupee weekly gilt auction as well. While the result of the auction came along expected lines, all four gilts were tendered at sharply lower rates than their previous close.
“We avoided the worst-case scenario at the auction, it sailed through and cutoffs were on expected lines because bids were stopped at 1130 (IST), because the US yield surprise was made even worse after the (14-day) variable rate reverse repo result,” said a dealer at a private bank.
Traders trimmed holdings of short-term gilts after the 14-day, 4-trln-rupee variable rate reverse repo auction by the Reserve Bank of India did not attract enough bids to cover the entire notified amount. With banks refraining from tendering excess cash, traders feared that surplus liquidity in the financial system was shrinking and would limit aggressive bets on short-term gilts, dealers said.
The yield on the 5.63%, 2026 bond rose the most among liquid gilts, as the paper was not selected for the RBI’s next gilt purchase. Further, uncertainty over the Centre’s quantum of borrowing in Oct-Mar saw investors unwilling to stock up on the paper, as any additional borrowing is expected to occur in short-term gilts, dealers said.
Informist exclusively reported earlier this week, citing a finance ministry official, that the RBI and the Centre may tentatively meet on Monday to decide the quantum of borrowing in the second half of 2021-22 (Apr-Mar). The market will keep a keen eye on whether the government borrows extra to repay the shortfall in goods and services tax cess collections to states.
“The long-end is slightly better protected because of the (bond buy) auction next Thursday, while the short-end only has downside risks due to impending normalisation and GST borrowing if it comes,” said a dealer at a state-owned bank.
The RBI has offered to buy up to 150 bln rupees worth of three gilts, including the 6.10%, 2031 bond and the 6.64%, 2035 bond, at an auction under the government securities acquisition programme on Thursday.
CCIL GLITCH
The electronic platform run by Clearing Corp of India Ltd suffered a technical glitch today, as gilt prices failed to update towards the end of the session, even though trades were being executed, dealers said.
The last reported trade in the 10-year benchmark 6.10%, 2031 bond on the CCIL website was at 1536 IST.
“I think it’s primarily on the output end on the website, we didn’t face any issues on the (Negotiated Dealing System – Order Matching platform) screen,” said a dealer at a foreign bank.
OUTLOOK
Gilts are not traded on Saturday. On Monday, government bonds may open steady ahead of the release of the Centre’s borrowing calendar for Oct-Mar. If the government intends to borrow from the market next week, it would have to announce the auction latest by Tuesday, dealers said.
Dealers may also remain wary of a further rise in US Treasury yields, after the severe volatility seen today.
The 10-year benchmark 6.10%, 2031 bond and the 6.64%, 2035 bond may rise due to the inclusion of these papers in the next round of RBI’s bond purchase under the government security acquisition programme on Thursday.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.15-6.21% on Monday.
India Gilts: Fall more as stop-losses triggered on rise in US yields
NEW DELHI–1425 IST–Government bonds fell further because stop losses were triggered in the 5- and 10-year benchmark papers, as yields on US Treasury notes rose more today, dealers said.
Losses in the 10-year benchmark 6.10%, 2031 bond mounted as yield on the paper topped the psychologically-crucial 6.18% mark. Meanwhile, traders trimmed holdings of the 5.63% gilt as its yield rose past 5.65%.
Yield on the 10-year benchmark US Treasury note, which had climbed 9 basis points to settle at a two-month high of 1.41% on Thursday, rose to 1.42% today.
The rise in US yields was mainly because the Federal Reserve after its latest policy meeting indicated that it envisages a quicker-than-expected taper of its asset purchases, as well as an earlier-than-expected hike in interest rates.
Moreover, selling pressure on short-term bonds increased after the 14-day, 4-trln-rupee variable rate reverse repo auction by the Reserve Bank of India did not attract enough bids to tender the full amount.
Traders were concerned the lack of bids indicated that the excess liquidity to park in short-term gilts was reducing, dealers said.
Traders also fear lack of demand at the weekly gilt auction today, and a consequent devolvement on underwriters or rejection of all bids for one of the two liquid gilts up for auction–the 5.63%, 2026 gilt or 6.67%, 2035 gilt.
“Auction bidding wasn’t as strong as it has been (in last few weeks), I think some investors stayed away from bidding this time around because of the reaction to US yields, it may be public-sector banks holding the book in the end today,” a dealer at a private bank said.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.15-6.21% today. (Aaryan Khanna)
India Gilts: Sharply down as US bond yields surge on fear of Fed taper
NEW DELHI–1020 IST–Government bonds fell sharply, tracking an overnight surge in US Treasury yields as investors digested the eventual tapering of asset purchases by the US Federal Reserve, dealers said.
The yield on the 10-year benchmark US Treasury note climbed to a two-month high of 1.41% on Thursday from 1.32%. 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.
At the conclusion of the US Federal Open Market Committee’s meet on Wednesday, policymakers suggested that the economy had made substantial progress for the central bank to moderate its pace of asset purchases soon. During a press briefing, US Fed Chair Jerome Powell suggested that the tapering of its asset purchases could begin as soon as November.
“Now that the US yields have reacted to Fed’s taper timeline, it is the spillover effect we are witnessing in our market today, as EMs (emerging markets) the risk of FPI outflows due to tapering was seen pushing the yields higher,” a dealer with a private bank said.
With the US Federal Reserve likely to reduce its asset purchase programme, domestic market participants fear foreign portfolio investors may look to trim their holdings of Indian sovereign bonds after being net buyers in August and September so far.
In August, overseas investors had pumped in 39.18 bln rupees into Indian bonds under the general limit and the fully accessible route, the most this financial year.
According to data on Clearing Corp of India’s website, overseas investors bought over 70.67 bln rupees of gilts cumulatively under the general limit and the fully accessible route in September so far.
“The FPIs have come in a big way in domestic bonds since August which had allowed the yields to fall, but if the FPIs start exiting right now, that could alter the supply-demand dynamics once again. Will have to wait to see how things go at auction today, any signs of weak result could further push the yields up by at least another 2-3 odd bps,” a dealer with a primary dealership said.
However, participants say prices may remain in a narrow range until the auction results are out, as it would indicate whether the fears of tapering have hampered demand for dated securities at the auction.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.14-6.19% today. (Vaibhav Chakraborty)
India Gilts: Seen down on jump in US ylds; weekly debt sale in focus
NEW DELHI – Government bonds may open lower today following the overnight jump in US Treasury yields as investors shifted their focus towards the eventual tapering of the US Federal Reserve’s asset purchase programme.
The yield on the 10-year benchmark US Treasury note climbed to a two-month high of 1.41% on Thursday. 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.
At the conclusion of the US Federal Open Market Committee’s meet on Wednesday, policymakers had suggested that the economy has made substantial progress for the central bank to moderate its pace of asset purchase soon. During the press briefing, US Fed Chair Jerome Powell suggested that the tapering of its asset purchase could begin as soon as November.
The market expects losses to be limited during the day as traders may exercise caution ahead of the 310-bln-rupee weekly debt sale today.
The government is scheduled to raise 110 bln rupees through the 5.63%, 2026 bond; 30 bln rupees through the floating rate bond, 2034; 100 bln rupees through the 6.67%, 2035 bond; and 70 bln rupees through the 6.67%, 2050 bond.
Even though the median of Informist’s underwriting cutoff poll suggests that the auction is likely to draw firm demand despite the rise in the US Treasury yields, there is uncertainty over the demand for the 2050 gilt at the auction.
Moreover, the prices of the 10-year benchmark 6.10%, 2031 bond and the 6.64%, 2035 bond may find support during the day due the inclusion of these papers in the last tranche of the Reserve Bank of India’s bond purchases under the government security acquisition programme in the ongoing quarter.
After market hours on Thursday, the RBI announced it would purchase three gilts worth 150 bln rupees on Sep 30 under its bond buy plan, and simultaneously sell 150 bln rupees worth of three short-term gilts maturing in 2022.
Later today, prices will likely take further cues from the demand and cutoff prices set by the RBI at the weekly debt sale.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.11-6.17% today. (Vaibhav Chakraborty)
End
US$1 = 73.70 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Mainak Moitra
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