Informist, Tuesday, Nov 23, 2021
By Aaryan Khanna
NEW DELHI – Government bonds ended lower tracking an overnight jump in US Treasury yields over fears of a quicker pace of policy normalisation following Federal Reserve Chair Jerome Powell’s nomination for a second term in office.
The 10-year benchmark 6.10%, 2031 bond ended at 98.11 rupees or 6.36% yield against the closing level of 98.20 rupees and 6.35% on Monday.
Global bond investors bet on a faster-than-expected pace for tapering of stimulus and interest rate hikes in subsequent policy decisions by the US Federal Open Market Committee after Powell’s nomination.
Moreover, top Fed officials on Friday said that the central bank could look to accelerate the tapering of stimulus in the wake of inflation touching a three-decade high in October. A completion of the central bank’s asset purchase programme, currently scheduled to wind up at the end of June, is seen as a precursor to rate hikes in the US.
Yield on the 10-year benchmark US Treasury note jumped 9 basis points to settle at 1.63% on Monday. A rise in US Treasury yields narrows the interest rate differential between the haven asset and emerging market debt, making the latter more appealing to foreign investors.
“It is all about global factors weighing in on the domestic market, domestic factors are nowhere to be seen on the negative side barring a food inflation spike due to unseasonal rains,” a dealer at a private bank said.
“Banks are parking their cash in state bonds, they’re going light on gilts which are being buffeted by the insecurities on the global front.”
The cut-off yield for 10-year bonds of state governments at the auction today offered a 51-55 bps spread over the 10-year benchmark 6.10%, 2031 gilt. The spread has declined since the beginning of November as concerns of elevated inflation in developed economies started growing.
At the auction on Oct 26, the 10-year state bonds offered a spread of 57-64 bps over the 10-year benchmark gilt.
Right at the outset of trade, traders trimmed their holdings of gilts to reduce their exposure to adverse global cues, dealers said.
However, prices rose briefly after Informist reported, citing a senior government official, that India would release oil from its strategic reserves to refiners in the next five to seven days on the US government’s request.
The Centre is looking to release up to 5 mln barrels of crude oil from strategic reserves from a total capacity of around 38 mln bbl, which could serve as a reprieve for domestic prices, the official said. India is the world’s third-largest consumer of crude oil and depends on imports to meet over 85% of its requirement.
Gilt prices slumped again as the action was not seen bringing down import-led inflationary pressures, dealers said. The Brent crude oil contract for January delivery was steady through the day’s trade at around the $79-per-bbl mark.
“I’m not sure why the market bounced a little on the report, to be honest, because the gain is not going to translate to any change in either global prices or domestic fuel prices,” a dealer at a state-owned bank said.
According to data on the RBI’s Negotiated Dealing System – Order Matching Platform, the market-wide turnover today was 233.40 bln rupees, against 246.00 bln rupees on Monday.
OUTLOOK
On Wednesday, gilts may open steady as traders may refrain from placing large bets on a lack significant domestic cues.
Further, traders may keep to the sidelines in the run-up to the RBI’s next policy review from Dec 6-8.
Dealers also awaited comments on growth and inflation from US Fed officials in the minutes of its most recent policy meet, scheduled to be released after market hours on Wednesday.
The uncertainty over global interest rates amid rising inflation could weigh on domestic bonds.
Any sharp movement in US Treasury yields and crude oil prices may guide domestic bonds in early trade.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.33-6.40%.
India Gilts: Remain dn; sharp rise in US ylds outweighs oil release
NEW DELHI–1455 IST–Government bonds remained down as nomination of US Federal Reserve Chair Jerome Powell for a second term led to fears of quicker-than-expected rate hikes by the central bank.
US Treasury yields jumped overnight on the view that the continued leadership of Powell would likely lead to the Fed pursuing an aggressive path of policy normalisation and rate hikes in 2022 while the economy grapples with higher inflation.
Prices rose briefly after Informist reported, citing a senior government official, that India would release oil from its strategic reserves to refiners in the next five to seven days.
The government is looking to release up to 5 mln barrels of crude oil from strategic reserves from a total capacity of around 38 mln bbl, which could be a reprieve for domestic prices. India is the world’s third-largest consumer of crude oil and depends on imports to meet over 85% of its requirement.
However, the trajectory of rate hikes and an associated hit to global growth prospects led to continued uncertainty over the actions of central banks globally, dealers said. Traders trimmed their gilt holdings to avoid exposure to rate developments on the global front.
“It (the release of oil) is a temporary reprieve, and may do more for the global supply crunch, but domestically the impact may not be that important, while the pricing in on US rate hikes has to happen now otherwise the (domestic) market will be behind the curve,” a dealer at a private bank said.
Meanwhile, call money rates have also edged up as excess liquidity in the financial system has declined due to outflows for goods and services tax, as well as due to cash parked by banks in the variable rate reverse repos. The rise in near-term money rates may put pressure bonds maturing under five years, dealers said.
Yield on the 10-year benchmark 6.10%, 2031 bond is likely to be at 6.34-6.39% today. (Aaryan Khanna)
India Gilts: Down on US yield rise, Fed officials’ asset taper view
NEW DELHI–1055 IST–Government bonds were down because of an overnight surge in the US Treasury yields as the White House nominated incumbent US Federal Reserve Chair Jerome Powell for a second term, leading to the view that the central bank could accelerate tapering its asset purchase and interest rate hikes, dealers said.
Apart from the jump in the US Treasury yields, swap rates in the US also indicated that the central bank could deliver two rate hikes of 25 basis points each in June and November, respectively, dealers said.
Moreover, top Fed officials on Friday said that the central bank could look to accelerate the tapering of stimulus in the wake of inflation touching a three-decade high in October.
Market considers the pace of asset purchase tapering a precursor to the eventual rate hikes, with Fed earlier was expected to complete it tapering programme by mid-2022, dealers said.
“There is a weakness in the market coming from the rise in US yields following the nomination of Powell, who will have to deal with a rising interest rate environment in his second tenure,” a dealer with a private bank said.
“…then some top officials continue to come out with hawkish comments and now there is good possibility that next meeting could see them upping the quantum of asset tapering that would bring forward the view on rate hikes,” the dealer said.
However, losses were limited as traders are unwilling to add or trim bond holdings in the current environment of uncertainty over economic growth and the near-term interest rates, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond is likely to be at 6.34-6.39% today. (Vaibhav Chakraborty)
India Gilts: Seen down as US yields soar, Fed Powell may get 2nd term
NEW DELHI – Government bonds may open lower because US Treasury yields soared overnight after US President Joe Biden nominated Jerome Powell for a second term as chair of the US Federal Reserve.
Yield on the 10-year benchmark US Treasury note jumped 9 basis points to settle at 1.63% on Monday, as investors were concerned that Powell’s reappointment could make a case for faster-than-expected pace for tapering of stimulus and interest rate hikes.
Moreover, comments from other Fed officials on Friday also dampened appetite for US Treasury notes as they suggested that the central bank could look to accelerate its tapering of stimulus amid rising inflation.
Fed Vice Chair Richard Clarida and Governor Christopher Waller have indicated that the there is a possibility for the central bank to step up their tapering and this may be discussed it in the last monetary policy meeting for the year.
“The rapid improvement in the labour market and the deteriorating inflation data have pushed me towards favouring a faster pace of tapering and a more rapid removal of accommodation in 2022,” Clarida said.
Meanwhile, comments from the Reserve Bank of India’s Executive Director Mridul Saggar to reduce the excess liquidity within the current monetary policy stance may also weigh on government bonds, especially the shorter-maturity papers, which are sensitive to liquidity conditions in the financial system.
Speaking at a discussion hosted by the National Stock Exchange Ltd and the International Monetary Fund, Saggar said, “At this juncture, I think it is not the job of the Monetary Policy Committee to continue these extraordinary, unconventional measures. We need to sort of calibrate this and lower liquidity levels within the accommodative stance are possible.”
However, traders are of the view that any fall in the government bonds is likely to be limited as there is reluctance to add or trim bond holdings in the current environment of uncertainty over economic growth and the near-term interest rates.
Additionally, there are also concerns over a delayed economic recovery due to the resurgence of cases despite the rapid vaccination globally.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.34-6.39%. (Vaibhav Chakraborty)
End
US$1 = 74.42 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Snigdha Kuttikat
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