Informist, Friday, Jan 7, 2022
By Aaryan Khanna
NEW DELHI – Government bonds ended lower as traders trimmed their holdings after the Reserve Bank of India devolved a large quantum of the 5.74%, 2026 gilt on underwriters at the weekly gilt auction today, dealers said.
Today, the 10-year benchmark 6.10%, 2031 bond ended at 96.91 rupees or 6.54% yield, against 97.02 rupees or 6.53% yield on Thursday.
The central bank devolved 43.88 bln rupees of the 5.74%, 2026 gilt on primary dealers, with traders moving to lighten their books ahead of the weekend due to the incoming supply, dealers said.
The government raised 245 bln rupees at the auction today against a notified amount of 240 bln rupees, with 25 bln rupees being raised in the 4.56%, 2026 bond against the 20 bln rupees notified.
“There is only a limited appetite on the books right now, once that uncertainty over result was over, the bearish mood came through again,” a dealer at a private bank said.
The high cut-off price at which the RBI devolved the bond indicated the central bank was uncomfortable with the rise in yield in the 5-year benchmark paper. However, with the RBI unlikely to conduct an open-market operation to cap yields in the near term, demand remained muted in the paper, anticipating a fall in the price, dealers said.
Early in the day, the market had anticipated partial devolvement in the 4.56%, 2023 bond, the 5.74%, 2026 bond and the 6.67%, 2035 bond due to tepid demand for dated securities amid adverse global factors, including a surge in US Treasury yields and crude oil prices. Consequently, primary dealers demanded high underwriting fees from the RBI before the auction began.
Ahead of the result, traders stocked up on gilts, speculating that some state-owned banks had placed large bids for the gilts at the auction, dealers said. On the cusp of the result, most gilts traded at their day’s highs.
The cut-off price of 99.04 rupees for the 6.67%, 2035 bond was 12 paise higher than the market expected, according to the median in a poll by Informist. With the devolvement, primary dealers booked profits on the paper due to the 8.44 paise underwriting fee given to them, as they made room for the devolved stock, dealers said.
Further, RBI’s comfort with accepting higher yields in other gilts at the auction attracted investors demanding greater returns. Traders speculated that mutual funds bid aggressively for the 2023 paper as they looked to stock up on short-term gilts at lucrative spreads over Treasury bills, dealers said.
“With demand dodgy, we are running a fine line every week to absorb the supply, so any devolvement becomes a burden when there is no money to be made in the 5.74%, 2026 gilt despite any (underwriting) fees,” a dealer at a primary dealership said.
According to data on the RBI’s Negotiated Dealing System – Order Matching platform, the market-wide turnover was 197.85 bln rupees, against 207.00 bln rupees on Thursday.
OUTLOOK
Gilts are not traded on Saturdays.
On Monday, government bonds may open lower after the RBI devolved a large quantum of bonds on the market, with the central bank seen refraining from announcing measures to cap yields.
However, investors may be keen to step up their purchases of dated securities at lucrative levels after the recent rise in yields.
Any sharp movement in US Treasury yields and crude oil prices might also lend cues at open.
On Monday, the yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.48-6.56%.
India Gilts: Slightly up; devolution fears ease despite tepid demand
NEW DELHI–1445 IST–Most government bonds rose slightly ahead of the result of the 240-bln-rupee weekly gilt auction as the fear about the Reserve Bank of India devolving a large quantum of gilts on underwriters ebbed, dealers said.
The market was of the view that the Reserve Bank of India would accept bids for three of the four papers at auction, keeping prices supported as underwriters had paid high fees anticipating large quantum of devolution in the 4.56%, 2023 bond, the 5.74%, 2026 bond and the 6.67%, 2035 bond at the auction, dealers said.
Traders speculated that the 2023 and 2035 gilts that the central bank had devolved at their previous issuance on Dec 24 may have seen more buying interest at the auction from mutual funds and other investors due to the recent rise in yields, dealers said.
“After the bidding it looks like 5.74%, 2026 gilt has a real chance of devolvement, otherwise the rest on the short- and long-end should sail through,” a dealer at a private bank said.
Gilts may fall sharply should the RBI signal its discomfort with high yields and devolve the gilts on primary dealers. The central bank was not seen capping yields in the near term with an open market operation that may lead yields higher as underwriters offloaded auction stock in the secondary market, dealers said.
Meanwhile, the 10-year benchmark 6.10%, 2031 bond rose in a thin trade as uncertainty over the auction result did not extend to the paper and investors added it to their portfolios at levels seen attractive, dealers said.
Today, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.49-6.55%. (Aaryan Khanna)
India Gilts: Steady ahead of debt sale outcome; demand seen tepid
NEW DELHI–1045 IST–Government bonds were steady ahead of the outcome of the 240-bln-rupee weekly gilt auction because traders exercised caution amid uncertainty over demand for dated securities at the debt sale, dealers said.
Appetite for dated securities has been weak amid concern about absorption of large supply of issuances as the Reserve Bank of India has also refrained from taking measures to cap the rising yields, dealers said.
Amid weak appetite for dated securities, traders expect the central bank to either devolve the stocks on primary dealers or reject bids for the paper, but the cutoff set by the RBI for underwriting commission payable to primary dealers suggests that it may resort to former, dealers said.
The RBI set 5.80 paise underwriting fee cutoff for 4.56%, 2023 bond, 11.00 paise for 5.74%, 2026 bond, 8.44 paise for 6.67%, 2035 bond and 7.80 paise for 6.99%, 2051 bond.
Market had widely expected the RBI to take steps with the rise in yields after its actions at the previous two weekly auctions which were seen as a signal with its discomfort with the rising yields.
However, the RBI did not take any measures, leaving the market disappointed at a time when the appetite for dated securities is weak and domestic cues limited.
“Today anything can happen (at the auction), it can be cancelled, it can be partially devolved, anything can happen with RBI not coming in with OTs (Operation Twists),” said a dealer with a state owned bank. “Whatever it will do, it will do at the auction only and market will take direction from that only.”
The result of the auction will provide the market with a direction in which the central bank expects the yields to head, dealers said.
In the initial trades, bond prices had open lower as an overnight rise in US Treasury yields and crude oil prices weighed on the market sentiment, dealers said.
Today, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.50-6.56%. (Shubham Rana)
India Gilts: May fall as demand at 240-bln-rupee debt sale seen tepid
NEW DELHI – Government bonds are seen opening lower today because demand at the 240-bln-rupee weekly gilt auction is seen tepid after the Reserve Bank of India refrained from announcing measures to cap the rising yields.
The government has offered to raise 20 bln rupee through sale of the 4.56%, 2023 bond, 60 bln rupees through the sale of the 5.74%, 2026 bond, 90 bln rupees through the sale of 6.67%, 2035 bond, and 70 bln rupees through sale of the 6.99%, 2051 bond at auction today.
Noting the sharp rise in bond yields domestically amid weak appetite for dated securities, market participants have been hopeful that the RBI, which has shown its discomfort with higher yields at the auction, may announce measures to cap yields and indicate its support to the market. So far, the market has been left disappointed on that front with the RBI refraining from announcing measures to anchor yields.
In the previous two auctions, the RBI has devolved large sums of bonds on primary dealers and rejected a large number of bids, respectively, to signal its discomfort with yield levels present in the market.
Traders will also look at the result of the underwriting fee cutoff to get a better sense of what can be expected at the weekly debt sale today, dealers said.
Globally, US Treasury yields inched higher on Thursday after US Federal Reserve officials were seen expecting three interest rate hikes in the minutes of the December meeting of the Federal Open Market Committee, which weighed on Indian government bonds.
US Treasury yields settled at 1.73% on Thursday and have risen 21 basis points since the start of the calendar year 2022.
Moreover, a rise in crude oil prices may weigh on bonds during the day, with the Brent Crude futures for March delivery having crossed the psychologically-crucial $80 per barrel mark and settling $81.99 per bbl on Thursday.
Today, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.50-6.56%. (Shubham Rana) End
US$1 = 74.31 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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