Informist, Thursday, Jan 6, 2022
By Shubham Rana
NEW DELHI – Government bonds ended off lows today because investors stepped up their purchases of dated securities towards the fag end on the view that the Reserve Bank of India may look to step in and announce measures to cap the rise in yields, dealers said.
Today, the 10-year benchmark 6.10%, 2031 bond ended at 97.02 rupees or 6.53% yield, against 97.14 rupees or 6.51% yield on Wednesday.
Bond prices had fallen sharply earlier in the day because the yield on the 10-year benchmark US Treasury note rose by 5 basis points to settle at 1.71%, after minutes of the US Federal Open Market Committee’s meeting held in December signalled a quicker than expected tightening of the financial conditions to curb the multi-decade high inflation, dealers said.
According to the minutes, Federal Reserve officials expect at least three interest rate hikes this calendar year. Fed policymakers also signalled that the central bank could start reducing its overall asset holdings at a faster pace than expected earlier.
According to the CME FedWatch Tool, the likelihood of the Fed hiking interest rates by 25 basis points in March is seen at over 66% as against 27.1% a month ago.
Trade volumes remained low today because traders were cautious as they expect the RBI to take measures like an Operation Twist to cap the rise in yields, dealers said.
“Market is without any volume, so there was a last moment spur in the market, but currently the market is directionless,” said a dealer with a state-owned bank. “The market is driven only because of UST (US Treasury yields) and crude factor.”
Meanwhile, the market also expects RBI to approach its policy normalisation with caution amid an unprecedented rise in COVID-19 cases in the country. Restrictions have been imposed by states to curb the spread of virus, which is expected to disrupt economic activity and weigh on the nascent recovery, dealers said.
In the wake of growth concerns, the market believes the central bank would not prefer to tighten financial conditions as doing so could have far-fetched repercussions on the economic recovery, dealer said.
“There is hope for an OT (Operation Twist) as the RBI had in its policy meeting announced that it will support the market when needed, but no one is sure of the OT,” the dealer said.
The RBI has stood firm in its resolve to support growth as long as necessary, despite the global headwinds, and the central bank could refrain from tightening financial conditions at a faster pace, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond rose to as much as 6.5470% today, a level seen lucrative by market participants, which prompted investors to step up their purchases at this level.
According to data on the RBI’s Negotiated Dealing System – Order Matching platform, the market-wide turnover was 207 bln rupees, against 145.75 bln rupees on Wednesday.
OUTLOOK
On Friday, government bonds may open lower ahead of the 240-bln-rupee weekly gilts auction as traders expect the demand for dated securities to be muted if the RBI refrains from announcing measures to cap the yields.
The government is looking to borrow 20 bln rupee through the sale of 4.56%, 2023 bond, 60 bln rupees through the sale of 5.74%, 2026 bond, 90 bln rupees through the sale of 6.67%, 2035 bond, and 70 bln rupees through the sale of 6.99%, 2051 bond on Friday.
The appetite for dated securities is seen weak due to large supply of dated securities amid lack of RBI support. Traders believe that different segments of the market are running heavy gilt portfolios.
However, investors may be keen to step up their purchases of dated securities at lucrative levels.
Any sharp movement in US Treasury yields and crude oil prices might also lend cues at open.
On Friday, the yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.48-6.56%.
India Gilts: Remain down as US FOMC minutes suggest speedy tightening
NEW DELHI–1355 IST–Government bonds remained down because the minutes of the US Federal Open Market Committee’s meeting held in December suggested that the central bank may look to tighten financial conditions as it looks to tame inflation, which is at a multi-decade high, dealers said.
Concerns over the Federal Reserve hastening the policy unwinding have seen the yield on the 10-year benchmark US Treasury note rise 19 basis points since the start of 2022. This has led to domestic gilt yields rising to a near two-year high, dealers said.
Yield on the 10-year benchmark 6.10%, 2031 gilt has risen 9 basis points since Monday and breached the psychologically crucial 6.50% level, prompting investors to step-up their purchases as the yield is seen lucrative at 6.54-6.55% levels, dealers said.
“What we have seen in the last couple of days is down to global spillover as the minutes have made it clear that the Fed isn’t bothered by Omicron and they will do absolutely anything to tighten conditions so as to bring down inflation,” said a dealer with a private bank.
Moreover, traders believe that the Reserve Bank of India’s policy normalisation path is likely to be more gradual than the one being taken by central banks of developed markets, dealers said.
In light of the surging coronavirus cases in the country, states have already placed restrictions that are likely to impact economic activity. But with growth being the primary focus for the RBI even before the onset of pandemic, traders believe that it may go easy on tightening the financial conditions.
“…if we look at the domestic picture for a country like India, surge in (COVID-19) cases not only poses a risk to economic activity but could also put the existing infrastructure under a lot of pressure. So, it doesn’t make sense for the RBI to push ahead with tightening because their focus has always been growth, and I think that isn’t likely to change soon,” the dealer said.
Several economists have already scaled back their expectation of a reverse repo rate hike in February, while money market rates have eased this week, dealers said.
During the day, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.51-6.56%. (Vaibhav Chakraborty)
India Gilts: Down; US ylds rise, Fed minutes signal faster tightening
NEW DELHI–1110 IST–Government bonds fell sharply today because of an overnight surge in US Treasury yields as minutes of the US Federal Reserve’s December meeting showed that the central bank could tighten the monetary policy at a faster pace to curb a four-decade high inflation, said dealers.
Fed officials also signalled that the central bank could start reducing its overall asset holdings at a faster pace and set the stage to raise interest rates. Members of the Federal Open Market Committee are anticipating three quarter-percentage-points rate increases this year to combat inflation.
“After the minutes, expectations of a rate hike in March are very high now and balance sheet runoff may also begin earlier than expected, but economists in India expect Reserve Bank of India to go slow in their normalisation due to Omicron,” said a dealer with a state owned bank.
According to the CME FedWatch Tool, the likelihood of the Fed hiking interest rates by 25 basis points in March stands at over 66% as against 27.1% a month ago.
Back home, the market expects RBI to tread with caution as COVID-19 cases surge and the Omicron variant spreads. States have proactively imposed restrictions to curb the spread of virus, which may disrupt economic activity, dealers said.
The RBI has stood firm in its resolve to support growth as long as necessary, despite the global headwinds, and the central bank could refrain from tightening financial conditions at a faster pace, dealers said.
Dealers, however, expect yield to remain below the 6.55% level as it is considered lucrative by investors and traders.
Today, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.51-6.56%. (Shubham Rana)
India Gilts: Seen dn; US ylds rise on prospect of faster Fed rate hike
NEW DELHI – Government bonds may open lower tracking a rise in US Treasury yields as minutes of the December Federal Open Market Committee’s meeting indicated that a majority of the members were seen pushing to hike interest rates at a brisk pace to curb multi-decade high inflation levels.
With inflation in the US soaring to a four-decade high in November, Federal Reserve officials are seen signalling three 25-basis-point interest rate hikes this calendar year, and three hikes in 2023.
The officials also signalled that the Fed could start reducing its overall asset holdings at a much faster pace to further tame high inflation and set the floor for a lift-off in interest rates.
Several participants noted that they viewed labour market conditions as already largely consistent with maximum employment. Some participants were of the opinion that it would be appropriate to raise the federal funds rate before maximum employment is fully achieved.
The comments from the rate-setting panel members indicate that the US central bank could be in a position to hike interest rates as soon as March by at least 25 basis points. This was reflected in the CME FedWatch Tool, which indicates the likelihood of the Fed hiking interest rates by 25 basis points in March at over 66% as against 27.1% a month ago.
However, a fall in government bonds may be limited during the day as traders refrain from placing large bets amid a lack of significant cues on the domestic front, and as they wait for the Reserve Bank of India to introduce measures to cap rising yields.
The central bank has so far resorted to devolvement and rejection of bids at the auction to indicate its discomfort with higher yields, but traders believe that such methods may not be fruitful in the long run as the government’s fiscal health is precarious despite robust revenue collections.
Traders expect the RBI to at least announce an Operation Twist to suggest to the market that it is there to keep rising yields in check.
A rise in yield may prompt investors to step up their purchases of dated securities at lucrative levels, with the 10-year benchmark 6.10%, 2031 gilt yield expected to be capped at the crucial 6.55% level.
Trade volumes may remain low as attendance at banks’ treasury desks has been impacted due to a rise in COVID-19 cases and subsequent restrictions on movement throughout the country.
Today, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.51-6.56%. (Shubham Rana)
End
US$1 = 74.49 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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