Informist, Monday, Dec 20, 2021
By Shubham Rana
NEW DELHI – Government bonds ended sharply lower because the Reserve Bank of India caught the market off guard by an unexpected announcement of a three-day variable rate reverse repo operation, which led to worries that overnight market rates could nudge higher, said dealers.
The RBI set the cutoff for the 3-day variable rate reverse repo auction at 3.99%, while it accepted a lower-than-notified amount. The RBI had notified it would conduct a 3-day variable rate reverse repo worth 2.00 trln rupees today and accepted all 811.60 bln-rupee offers it had received for it.
The median cutoff rate set by the RBI at its previous variable rate reverse repo operations was 3.99%, which had already pushed short-term money market rates higher, dealers said.
Moreover, the central bank, in its policy, had suggested that normalisation of surplus liquidity in the system was its priority before it moves to lift-off interest rates eventually, dealers said.
With the RBI stepping up its liquidity management operations to bring down the money parked in the fixed rate reverse repo window, market believes that the central bank is focused on normalising the liquidity adjustment facility corridor and may look to hike the reverse repo rate in February itself, dealers said.
Today, the 6.10%, 2031 bond ended at 97.63 rupees or 6.44% yield, against 97.63 rupees or 6.44% yield on Friday. The benchmark yield closed at the highest level since Apr 16, 2020.
The announcement caught market off guard as the market was of the view that the RBI is likely to conduct such variable rate reverse repo operations from January, after RBI Governor Shaktikanta Das in his statement announced that the liquidity absorption would be undertaken mainly through the auction route starting next month, dealers said.
On Friday, banks parked 3.13 trln rupees at the 14-day variable rate reverse repo auction against the maturity of 4.70 trln rupees. The balance of 14-day variable rate reverse repo of 1.57 trln rupees has been added in the overnight reverse repo in the system, which the central bank may look to absorb from the system through today’s variable reverse repo operations, dealers said.
“This was an exaggerated move by the market as there was no need for such a reaction in the longer dated securities,” said a senior dealer at a state-owned bank. “The three-day tenure is a little surprising, there could be some government expenditure and RBI could just be balancing the liquidity through the variable rate reverse repo auction.”
The 10-year benchmark yield closed at a 20-month-high today because stop-losses were triggered as the yield on the 10-year benchmark 6.10%, 2031 gilt topped the psychologically crucial 6.42% and 6.45% levels, successively.
However, towards the fag end of the day, the rise in yields was capped as investors were seen stepping up their purchases of dated securities at lucrative levels following the earlier rise, dealers said.
“6.45% is a good level to buy with the positive global cues as US (Treasury) yields are quite low and crude is also below $72 per barrel,” said the dealer.
Meanwhile, the RBI did not accept any bids at the switch auction today. The RBI had offered to switch five gilts worth 200 bln rupees.
According to data on the RBI’s Negotiated Dealing System – Order Matching platform, the market-wide turnover today was 274.90 bln rupees against 185.80 bln rupees on Friday.
OUTLOOK
Government bonds may open steady on Tuesday because traders may stay on the sidelines due to lack of significant domestic cues.
However, the 10-year benchmark 6.10%, 2031 bond may edge lower during the day as the paper is expected to lose its benchmark status soon due to its high outstanding. The government is expected to soon announce a new 10-year bond.
Any sharp movement in US Treasury yields and crude oil prices might also lend cues at open.
On Tuesday, the yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.42-6.46%.
Today
Friday
Price
Yield
Price
Yield
5.63%, 2026
99.5000
5.7602%
99.6350 5.7243%
5.74%, 2026
99.7550
5.7966%
99.9100 5.7598%6.64%, 2035 98.2500 6.8406% 98.5600 6.8047%6.67%, 2035
98.5800
6.8290%
98.8500 6.7985%6.10%, 2031 97.6300 6.4351% 97.8025 6.4102%
India Gilts: Fall, 3-day reverse repo seen pushing up overnight rates
1300 IST PRICE HIGH PRICE LOW OPEN PREVIOUS6.10%, 2031PRICE (rupees)97.570097.890097.505097.870097.8025YTM (%) 6.44376.39786.45316.40076.4102
1300 IST PRICE HIGH PRICE LOW OPEN PREVIOUS5.74%, 2026PRICE (rupees)99.730099.910099.700099.910099.9100YTM (%) 5.80255.75985.80975.75985.7598
NEW DELHI–1300 IST–Government bonds fell sharply because traders were worried that the sudden announcement by the Reserve Bank of India about conducting a three-day variable rate reverse repo auction later today could push the overnight market rates higher, dealers said.
The RBI will conduct a three-day variable rate reverse repo auction for a notified amount of 2.00 trln rupees between 1330 IST and 1400 IST today.
The announcement came out of the blue as the market was expecting similar tenure variable rate reverse repo auctions next month following the central bank’s announcement at its recently concluded policy meet that the liquidity absorption will be undertaken mainly through the auction route from January, dealers said.
On Friday, banks parked 3.13 trln rupees at the 14-day variable rate reverse repo auction against the maturity of 4.70 trln rupees. The remaining balance of 14-day variable rate reverse repo of 1.57 trln rupees has been added in the overnight reverse repo in the system, which the central bank may look to absorb from the system through today’s variable reverse repo operations, dealers said.
The sudden announcement has led to concerns that the RBI is setting the floor for narrowing down the liquidity adjustment facility corridor through an eventual increase in the reverse repo rate from 3.35% in February, dealers said.
The median of cutoff set by the RBI at its previous reverse repo rate operations has been 3.99%, which has already nudged the short-term money market rates higher, dealers said.
Meanwhile, the prices fell further because stop-losses were triggered as the yield on the 10-year benchmark 6.10%, 2031 gilt topped the psychologically crucial 6.42% and 6.45% levels, successively. The yield on the 10-year benchmark bond rose to the highest level since Apr 15, 2020.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.42-6.47%. (Shubham Rana)
India Gilts: Steady; lack of appetite caps gains from global cues
1055 IST PRICE HIGH PRICE LOW OPEN PREVIOUS6.10%, 2031PRICE (rupees)97.850097.890097.790097.870097.8025YTM (%) 6.40356.39786.41216.40076.4102
NEW DELHI–1055 IST–Government bonds were steady in early trade amid a lack of participation and appetite from investors towards the end of the year limited demand for gilts despite positive global cues, dealers said.
Traders kept to the sidelines as they looked to close their gilt portfolios, with domestic banks approaching the end of the Oct-Dec quarter as well, dealers said.
Some traders trimmed their holdings of the 10-year benchmark 6.10%, 2031 bond that they picked up at the weekly gilts auction on Friday as the gilt’s price rose above the cut-off of 97.85 rupees, dealers said.
“The price pattern suggests that trimming of auction stock is happening, there is a sell-on-gains environment since demand is really bad and may even get worse towards end of year when the new paper comes in,” a dealer at a private bank said.
The 6.10%, 2031 gilt was out of favour as its outstanding approached the 1.50-trln-mark that is seen as the unofficial cap for the government’s borrowing in a single security, dealers said. The market expects a new 10-year bond to be issued at the next scheduled auction of that maturity on Dec 31.
Further, traders did not anticipate demand from foreign investors either due to a risk-off environment and surging COVID-19 cases hampering sentiment for emerging market assets, dealers said.
On Sunday, the World Health Organization said that the Omicron variant has been found in 89 countries so far and cases relating to the new variant are doubling every 1.5 to 3 days in places with community transmission.
The yield on the 10-year US Treasury note plunged 7 basis points since Thursday, while Brent crude oil futures for February were down 4.9% from Thursday’s close, in Asian trade today.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.38-6.43%. (Aaryan Khanna)
India Gilts: Seen up as US ylds, crude prices fall on COVID concerns
NEW DELHI – Government bonds may open higher tracking a fall in US Treasury yields and crude oil prices due to concerns that the fast-spreading COVID-19 infections could dent the nascent economic recovery.
The rise in infections associated with the newly-discovered Omicron variant has raised concerns over a fresh round of restrictions on movement that poses challenges to growth, with investors globally moving towards haven assets.
European countries geared up for further travel and social restrictions as a study warned that the rapidly-spreading Omicron coronavirus variant was five times more likely to reinfect people than the Delta variant.
The yield on the 10-year US Treasury note fell 3 basis points to 1.41% on Friday, and further declined to 1.38% in Asian trade today. A fall in US Treasury yields widens the interest rate differential between the haven asset and emerging market debt, making the latter more appealing for foreign investors.
Meanwhile, Brent crude futures for February delivery slumped $1.50 a barrel to $73.52 a bbl on Friday, and further to $71.77 a bbl in Asian trade on fears demand for the commodity may be hit severely by movement restrictions as cases rise.
Typically, a fall in crude oil prices reduces risks of imported inflation in India and provides more room for the Reserve Bank of India to prolong its monetary policy accommodation.
The People’s Bank of China cut its benchmark one-year loan prime rate by 5 basis points to 3.80% earlier today, in line with expectations, after a round of liquidity injections to spur growth in the world’s second-largest economy.
The rate cut was unlikely to have a material impact on domestic gilts and was broadly in line with other positive global cues as US Treasury yields continue to fall, despite the recent unwinding of policy accommodation by central banks including the US Federal Reserve and the Bank of England, dealers said.
Moreover, investors may stock up on gilts at yields considered attractive after the 10-year benchmark yield ended at 6.41% on Friday, its highest level since April 2020, dealers said.
However, traders may avoid aggressive bets on global cues after demanding higher yields at the gilt’s auction on Friday, expecting the government to issue a new 10-year bond in the week ending Dec 31, dealers said.
Prices may also be volatile in early trade before settling down in a narrow band due to a lack of participation, as foreign banks are seen avoiding large bets looking to close their trading books at the end of the year, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.35-6.41%. (Aaryan Khanna)
End
US$1 = 75.9050 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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