Informist, Monday, Jul 17, 2023
By Aaryan Khanna
NEW DELHI – Prices of government bonds ended higher today after a weak start, spurred by an intraday fall in US Treasury yields and domestic traders receiving fixed rates in the overnight indexed swap market, dealers said.
The 10-year benchmark 7.26%, 2033 bond closed at 101.26 rupees, or 7.08% yield, against 101.15 rupees, or 7.09% yield, on Friday.
The yield on the 10-year US Treasury note fell 4 basis points to 3.79% by the end of Indian market hours today, as investors in European trade piled up on the fixed income asset following weaker-than-expected GDP data in China.
Data from the National Bureau of Statistics showed China’s economy grew 6.3% on year in Apr-Jun compared to 7.3% projected by a Reuters poll.
Even before the move in US Treasury yields, traders speculated an Indian corporate house was receiving fixed rates in the five-year OIS, spurring buys in gilts as well, dealers said. Gilt prices had recovered most of the early losses by 1200 IST on the back of the move in swap rates.
“You can track the day’s trade in gilts simply if you look at the swap market,” a dealer at a primary dealership said. “It was that kind of day which had no real trigger and no real movement, but the price action requires some justification.”
At the outset, the outlook for gilt prices was negative, with US Treasury yields up on Friday on expectations of inflation rising from July after falling to a two-year low of 3.0% on year in June, helped by the statistical effect of a high base.
Despite anticipating monetary policy between the two countries would diverge, dealers looked to the world’s largest economy for cues as the domestic market did not offer any fresh triggers, particularly on interest rates.
At the current level, US Treasury yields do not pose a threat to India’s monetary policy decision-making, and fears of a reaction to the monetary policy in the US have faded provided the US Federal Open Market Committee goes ahead with only one rate hike instead of two, dealers said.
The US Federal Reserve’s rate-panel is almost unanimously expected to raise interest rates by 25 bps at its next rate decision on Jul 26. At the previous meeting, a median of US Fed officials’ views showed they expected rates to settle 50 bps higher by the end of 2023.
The early fall in domestic gilt prices was met by some value buying, particularly as the 10-year benchmark yield topped 7.10%. Moreover, investors were not keen to trim their holdings, as sales at current prices would incur a loss on their portfolios, dealers said.
Reserve Bank of India’s Monetary Policy Committee is likely to maintain status quo on rates for an extended period, which could extend into the next financial year starting April, dealers said. Consumer inflation in June was driven higher from May’s print by vegetable prices, but the RBI is not expected to meet the price rise with a rate action.
The sharp rise in tomato prices has prompted many economists to raise their inflation projection for Jul-Sep. In June, retail inflation rose to a higher-than-expected 4.81% from 4.31% in May, primarily due to the sharp rise in the vegetables index.
With the domestic economy still seen as a positive and India’s rate hike cycle firmly seen at an end, some traders anticipate gilt prices may rise despite heavy net gilt supply in Jul-Sep as US Treasury yields may fall after the Fed rate decision next week, dealers said.
“If you’re asking me for today, the movement is driven by only external factors, and supply-demand will also play out every week,” a dealer at a state-owned bank said. “We are definitely looking at yields returning to under 7.05%, if you look at a broader period, maybe post the US policy.”
According to data on the RBI’s Negotiated Dealing System-Order Matching platform, the turnover today was 527.95 bln rupees, compared with 389.00 bln rupees on Friday. Meanwhile, trades aggregating 150 mln rupees were settled in three deals with the digital rupee, as against 300 mln rupees settled in four deals on Friday.
OUTLOOK
On Tuesday, government bonds may open steady due to a lack of firm domestic cues, dealers said.
Traders look to the US FOMC decision next week amid a lack of key data this week, which could keep gilt prices in a narrow band, dealers said.
Traders may also track any sharp movement in US Treasury yields and crude oil prices.
The yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.06-7.12%.
India Gilts: Up; swap rates fall on domestic flows, US yields ease
NEW DELHI–1515 IST–Prices of most government bonds rose tracking a fall in overnight indexed swap rates, likely due to domestic traders receiving fixed rates on behalf of a corporate house, dealers said.
With no fresh triggers for short sales except for a rise in US Treasury yields that faded during the day, prices of bonds recovered early losses and remained higher, dealers said. The yield on the 10-year US Treasury note fell to 3.78% from 3.83% at settlement on Friday.
The 7.26%, 2033 bond lagged gains in the 14-year benchmark 7.41%, 2036 bond as it remained the favoured paper for short sales, while some traders took marginal profit from purchases at intraday lows.
Traders were also not keen to place short bets on the 2036 paper as the bond is not seen being issued regularly going ahead, with the government likely to replace it with a new 14-year, 2037 gilt this week, dealers said. Short sellers typically cover their bets at the weekly debt sales.
“The market has been quite dull since it recovered,” a dealer at a foreign bank said. “The auction stock is in the money, and people who bought at 100.05 (price of the 7.26%, 2033 bond) in the morning are also getting exits.”
The Reserve Bank of India set the 2033 bond’s cut-off price at 101.15 rupees at the auction on Friday, and closed at the same price. This allowed traders to sell the gilt at cost in the secondary market and passed the paper to the hands of investors who were not jittery in trimming their holdings of the paper, dealers said.
Moreover, large investors were not keen to sell the bond lower than the cost paid earlier in the financial year which began in April, as they remained optimistic prices would rise after the risk from the US Federal Open Market Committee’s next decision had passed, dealers said. The US Federal Reserve’s rate-setting panel is expected to raise interest rates by 25 basis points on Jul 26.
Until then, a lack of domestic cues may keep gilt prices in a narrow band, dealers said.
According to data on the RBI’s Negotiated Dealing System-Order Matching platform, the market-wide turnover was 352.80 bln rupees at 1515 IST, compared with 271.10 bln rupees at 1530 IST on Friday.
For the rest of the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.07-7.13%. (Aaryan Khanna)
India Gilts: Recover early losses tracking fall in swap rates
NEW DELHI–1200 IST–Prices of government bonds recovered early losses as domestic traders received fixed rates in the overnight indexed swap market, dealers said. The five-year swap rate fell to 6.25% from the day’s high of 6.31%.
The five-year swap rate rose to 6.31% in early trade tracking a rise in the 10-year benchmark US Treasury note at 3.83%, as against 3.77% at the end of Indian market hours on Friday, dealers said.
Further, participation in the 200-bln-rupee gilt switch auction was seen low as traders lacked interest in stocking up on longer-dated securities, dealers said.
Traders were hesitant on giving up on the shorter-tenure securities as the yield difference between the 10-year benchmark 7.26%, 2033 paper and the short-term bonds like the 7.06%, 2028 bond has narrowed, which has made the paper lucrative.
“There should not be any traders participating in the switch,” a dealer at a private bank said. “The switch offers an exit, allows traders to churn portfolios either in terms of booking profit or stop loss. Neither of those things is happening.”
The market was also not keen on stocking up on long-term papers that were not heavily traded, which were part of the destination securities offered at the switch, dealers said. As such, most traders may opt to hold onto their short-term bonds, dealers said.
The government has offered to issue 100 bln rupees of bonds maturing in 2032 at the switch tender, including 70 bln rupees of the 8.28%, 2032 bond.
“The tenures would only have been decided on with market consultation, so someone from the state-owned banks must have requested those maturities,” a dealer at a primary dealership said. “I have the bonds (source securities), but I’m not really looking to tender them, I have the old 10-year (7.26%, 2032 bond) for that tenure.”
According to data on the RBI’s Negotiated Dealing System-Order Matching platform, the market-wide turnover was 130.85 bln rupees at 1200 IST, compared with 112.95 bln rupees at 1150 IST on Friday.
For the rest of the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.07-7.13%. (Kasthuri Akhil)
India Gilts: Down as US yields up; traders avoid aggressive bets
NEW DELHI–0940 IST–Prices of government bonds were down tracking a rise in US Treasury yields. Traders avoided placing aggressive bets due to lack of firm domestic cues, dealers said.
“The momentum is slightly negative in the market. The demand at the auction was also weak on Friday,” a dealer at a state-owned bank said. “This week the people may place short bets on the 14-year paper as it is in the auction.”
Traders were concerned about the market sentiment for the 10-year benchmark 7.26%, 2033 paper, especially after the bond saw lower-than-expected demand at the 330-bln-rupee auction on Friday. Traders expected prices to move within a narrow range for most part of the day, as the market lacks clarity on the future trajectory of bond prices, dealers said.
Traders also expected the government to issue a new 14-year bond at Friday’s auction, which will replace the current 14-year benchmark 7.41%, 2036 paper. The price of the 2036 paper may see a downtrend in the latter half of the day as traders may trim their holdings of the bond in anticipation of the announcement, dealers said.
A finance ministry official told Informist that the government had earlier considered issuing the 7.41%, 2036 bond for one more week in case the demand for gilts was uncertain and the maiden issuance of the new 2037 bond would lead to a higher coupon.
Meanwhile, the yield on the 10-year benchmark US Treasury note rose to 3.83% on Friday from 3.77% at the end of Indian market hours the same day, which weighed on prices, dealers said. 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 to foreign investors.
After the US CPI data for June, fears of two consecutive rate hikes eased and some are optimistic that the US Federal Reserve may only raise rates once, at this month’s policy review. A hike of 25 basis points by the Fed is already factored in, dealers said.
Traders now awaited the US Federal Open Market Committee to deliver its rate decision on Jul 26, after which the domestic market expected to gain clarity on the rate trajectory in the world’s largest economy, which in turn may help guide the domestic sentiment as well, dealers said.
According to the CME’s FedWatch tool, a whopping 96% of Fed fund futures traders expect the US rate-setting panel to hike the federal funds rate by 25 bps on Jul 26, while the rest expect it to keep rates unchanged at 5.00-5.25%.
According to data on the RBI’s Negotiated Dealing System-Order Matching platform, the market-wide turnover was 24.00 bln rupees at 0940 IST, compared with 32.50 bln rupees at 0930 IST on Friday.
During the day, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.08-7.14%. (Kasthuri Akhil)
India Gilts: Seen opening lower tracking rise in US yields
NEW DELHI – Prices of government bonds are seen opening lower today tracking a rise in US Treasury yields. Moreover, after Friday’s downtrend, traders expect the market sentiment for the 10-year benchmark 7.26%, 2033 paper to remain dull, dealers said. On Friday, the price of the bond fell following lower-than-expected cut-off price at the 330-bln-rupee auction.
Today, the yield on the 10-year benchmark 7.26%, 2033 bond is seen at 7.06-7.13% as against 7.09% on Friday.
The yield on the 10-year benchmark US Treasury note rose to 3.83% on Friday from 3.77% at the end of Indian market hours the same day. 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 to foreign investors.
Further, recent favourable economic data from the US has increased expectations that the Federal Reserve may be nearing the end of its rate hiking cycle. Even though a hike of 25 basis points is widely expected at this month’s policy review, the market seems optimistic that the US rate-setting panel may not hike rates after that as the US economy cools.
According to the CME’s FedWatch tool, a whopping 96% of Fed fund futures traders expect the US rate-setting panel to hike the federal funds rate by 25 bps on Jul 26, while the rest expect it to keep rates unchanged at 5.00-5.25%. (Kasthuri Akhil)
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Vandana Hingorani
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