Informist, Wednesday, Oct 6, 2021
By Nikhil Patwardhan
MUMBAI – Government bonds ended lower as fears of inflation accelerated after crude oil prices rose sharply for the second day with the Organization of the Petroleum Exporting Countries and its allies refraining from increasing output targets even as oil prices had surged of late.
The 10-year benchmark 6.10%, 2031 bond ended at 98.72 rupees or 6.28% yield, as against 98.83 rupees or 6.26% yield on Tuesday.
The OPEC and its allies on Monday said they will stick to their plan of raising output by only 400,000 barrels a day every month till the end of the year despite calls from major consumers to step up production to ease oil prices.
The Brent crude oil futures contract for December delivery surged by over $1.30 per bbl to settle at $82.56 per bbl on Tuesday. The contract has soared 4.1% over the last two days. Today, it was largely steady in trade.
The rise in crude oil prices leads to higher imported inflation for large consumers of crude like India, thus giving the Reserve Bank of India less room to prolong its ultra-accommodative policy support.
The sharp rise in crude oil prices came just ahead of the RBI’s monetary policy review meeting which started today. The outcome of the meeting will be detailed on Friday.
Dealers thus said RBI Governor Shaktikanta Das’ comments on inflation and growth will be closely monitored as the view on near-term inflation might change with crude oil and other commodity prices rising sharply over the last three weeks.
Other than Das’ comments on growth and inflation, the market is keenly waiting to see whether the central bank takes any further steps to ramp up its liquidity management operations.
The central bank has been conducting 3-, 4-, 7- and 14-day variable rate reverse repo operations to absorb some excess liquidity from the system which had touched life-time highs in September. However, at the 7-day variable rate reverse repo auction, the central bank kept the cutoff at the highest possible rate of 3.99%, which spooked investors as they feared that the RBI was setting the stage for a reverse repo rate hike, dealers said. Some sections of the market also feared that the central bank would extend the duration of its variable rate reverse repo auctions to even 56 days.
However, some of these fears abated after the central bank set the cutoff for the 2-trln-rupee variable rate reverse repo auction it conducted on Tuesday on expected lines. Moreover, Informist today exclusively reported, quoting a banking source, that the RBI does not consider cutoffs on variable rate reverse repo auctions of less than 14-day maturities as a tool to signal its desired level of near-term interest rates which further reduced fears, dealers said.
Meanwhile, US Treasury yields also spiked as the threat of a debt default by the world’s largest economy grew over political disagreements, further weighing on domestic bonds. US Treasury Yields also rose on more immediate concern about the pace of the economic recovery ahead of key labour market data that will be released Friday.
The yield on the 10-year Treasury note surged 5 basis points to 1.54% on Tuesday, the first time in three days it breached the psychologically-crucial 1.50% mark. 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.
Treasury Bills
Yields on treasury bills have significantly hardened over the last two weeks with certain sections of the market reading the RBI’s recent move of setting aggressive cutoffs at its variable rate reverse repo operations as an attempt to nudge short-term rates higher, dealers said.
The cutoff set by the RBI today on the 91-day T-bill was 14 basis points higher than the one set on Sep 22, and that on the 182-day T-bill was 18 bps higher. The 364-day T-bill cutoff was up the most–29 basis points higher than the one set by the central bank on Sep 22.
The yield on the 364-day T-bill jumped the most tracking a sharp rise the one-year overnight indexed swap rate which has risen 16 bps since Sep 22, dealers said.
“One-year OIS has shot up and has gone and stayed above 4% now which is mainly due to fears of some sort of liquidity normalisation or narrowing of the corridor earlier than what people were expecting,” said a dealer with a private sector bank.
“The rise in one-year OIS is indicating that people now really expect liquidity normalisation either in October, which personally I don’t think would happen, or December or latest by February and so they are factoring it in the T-bill yields. Not just that, higher quantum in Oct-Dec compared to Jul-Sep and absence of mutual funds are weighing on the one-year T-bill,” the dealer said.
After the RBI had set the cutoff rate for the 7-day variable rate reverse repo auction on Sep 28 at the highest possible rate of 3.99%, one-year swap rate has risen by 16 bps.
The one-year swap rate, which is impacted by the liquidity conditions in the banking system, currently reflects a reverse repo rate hike of 40 basis points. Typically, the spread between the one-year OIS and overnight cost of funds is 25 bps–currently the overnight cost of funds is closer to the reverse repo rate of 3.35% due to excess liquidity in the banking system.
Moreover, the Centre released its T-bills borrowing calendar for Oct-Dec last week and according to the calendar, every week, the government will be borrowing 70 bln rupees through the sale of 364-day T-bill, against 40 bln rupees it used to raise the in 364-day T-bill in Jul-Sep.
Meanwhile, mutual funds, which were aggressively bidding at most T-bill auctions in September, were not seen bidding aggressively over the last two auctions, dealers said.
According to data on the RBI’s Negotiated Dealing System – Order Matching Platform, the market-wide turnover was 337.35 bln rupees, as against 315.10 bln rupees on Tuesday.
OUTLOOK
On Thursday, government bonds are seen opening steady in the run up to the outcome of the RBI’s policy review meeting.
Traders may avoid aggressive bets on short-term gilts amid fear that the central bank could take further measures that would push up short-term rates.
Any sharp movement in US Treasury yields and crude oil prices overnight may guide domestic bonds early in trade.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.23-6.30% on Thursday.
India Gilts: In thin band ahead of MPC outcome Fri; global cues weigh
India Gilts: In thin band ahead of MPC outcome Fri; global cues weigh
MUMBAI–1320 IST–Government bonds were in a narrow band after falling sharply in early trade, tracking a sharp overnight rise in crude oil prices and US Treasury yields.
Dealers were wary of placing large bets ahead of the outcome of the Reserve Bank of India’s monetary policy meeting which started today. The outcome will be detailed on Friday.
The outcome and post-policy address by RBI Governor Shaktikanta Das come at a time when global commodity prices have soared over the last two weeks on fears of a supply-demand mismatch, as more economies ease COVID-induced lockdowns, restrictions.
High prices of commodities, especially crude oil, result in an increased import bill for consumers such as India, which can add to inflationary pressures. Hence, comments by Das on inflation and growth are expected to be in focus, dealers said.
Certain sections of the market expect the central bank to ramp up its liquidity management operations. The RBI, recently, had set aggressive cutoffs for the shorter-tenor variable rate reverse repo operations it had been conducting.
This led to fears that the central bank was trying to push overnight rates higher and thus set the stage for a hike in the reverse repo rate or increase the duration of its variable rate reverse repo operations to even 56 days.
Currently, the central bank has been conducting variable rate reverse repo operations of tenors of three, four, seven, and 14 days.
However, on Tuesday, the central bank set the cutoff estimate for the 2-trln-rupee seven-day variable rate reverse repo operation on expected lines, which eased some of these fears.
Moreover, Informist today exclusively reported, quoting a banking source, that the RBI does not consider cutoffs on variable rate reverse repo auctions of less than 14-day maturities as a tool to signal its desired level of near-term interest rates which further mitigated fears, dealers said.
Dealers also await clarity on whether the central bank would taper down its outright gilt purchases from this month, which it had started under the government securities acquisition programme in April.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.25-6.30% during the day. (Nikhil Patwardhan)
India Gilts: Dn on crude, US yield surge; MPC meet outcome Fri eyed
India Gilts: Dn on crude, US yield surge; MPC meet outcome Fri eyed
NEW DELHI–1100 IST–Government bonds fell tracking global cues as crude oil prices surged overnight for the second day in row, stoking fears of inflation in the domestic economy.
Crude oil rose sharply because the Organization of the Petroleum Exporting Countries and its allies refrained from ramping up output targets despite elevated prices, at a ministerial meeting on Monday.
Brent crude oil futures for December have surged 4.1% over the last two days on the decision.
Further, yield on the 10-year US Treasury note broke the key 1.50%-mark for the first time in three days, which put more pressure on domestic gilts.
However, traders avoided aggressive bets on overseas triggers on caution ahead of the Reserve Bank of India’s Monetary Policy Committee three-day meeting from today.
Traders await the outcome of the policy on Friday and the central bank’s comments on normalising its monetary policy before placing large bets on gilts, dealers said.
“The market reaction is to be expected but all the inflation fears and so on will only be expressed in price fully after the policy, people have already positioned and won’t be too aggressive today since it (policy) is starting,” a dealer at a state-owned bank said.
In light of the concerns over inflation, traders trimmed their holdings in long-term gilts, which fell more than short-term papers.
Further, the RBI’s cutoff of 3.61% at the seven-day, 2-trln-rupee variable rate reverse repo auction on Tuesday was along expected lines. It provided comfort that the market was already pricing in the recent volatility in rates before the MPC meet outcome on Friday, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.25-6.30% during the day. (Aaryan Khanna)
India Gilts: Seen down on jump in crude, US yields; RBI policy eyed
NEW DELHI – Government bonds are seen down as fears about inflation have accelerated, with crude oil prices rising sharply for the second day after the Organization of Petroleum Exporting Countries and its allies refrained from ramping up output targets despite elevated prices. The overnight jump in US Treasury yields would also weigh on gilts, dealers said.
The OPEC and its allies, at their ministerial meeting on Monday, stuck to their plan to raise output by only 400,000 barrels per day every month till the end of the year despite calls from major consumers to step up production to ease oil prices.
The Brent crude oil futures contract for December delivery surged by over $1.30 per bbl to settle at $82.56 per bbl on Tuesday, jumping 4.1% over the last two days. Typically, a rise in crude oil prices increases upside risks to inflation in India and eats into the room for the Reserve Bank of India to prolong its monetary policy accommodation.
While domestic traders had already begun pricing in the potential of higher inflation on Tuesday, rising crude prices past the $80-82 per bbl band could suggest a further upward trajectory and consequent weakness for gilts, dealers said.
Moreover, US Treasury yields also spiked as the threat of a debt default by the world’s largest economy grew over political disagreements. Further, yields rose on more immediate concern about the pace of the economic recovery ahead of key labour market data that will be released Friday.
The yield on the 10-year Treasury note surged 5 basis points to 1.54% on Tuesday, the first time in three days it breached the psychologically-crucial 1.50% mark. 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.
However, traders may avoid aggressive bets on global cues as the RBI’s Monetary Policy Committee begins its three-day meeting today. Traders await whether the central bank would announce measures and provide guidance towards normalising its ultra-accommodative policy, which were expected along with the outcome of the meet on Friday, dealers said.
Traders fear the RBI may ramp up its liquidity management operations to mop-up excess liquidity on a more durable basis, or potentially hike the reverse repo rate by 15 basis points, which could lead to a sharp rise in short-term rates and may continue to keep them under pressure, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.25-6.30% during the day. (Aaryan Khanna)
End
US$1 = 74.98 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Michael Correya
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