Informist, Thursday, Sep 30, 2021
By Aaryan Khanna
NEW DELHI – Government bonds ended lower today, with long-term gilts slumping after the Reserve Bank of India set a lower-than-expected cut-off price at its gilt purchase under the Government Securities Acquisition Programme, while it bought a smaller quantum of the 6.10%, 2031 bond at the auction.
The central bank bought the 10-year benchmark 6.10%, 2031 bond and the 6.64%, 2035 bond – the two on-the-run gilts at the auction – at cut-off prices 4-8 paise below the median of an Informist poll of 11 gilt dealers.
Meanwhile, it purchased only 20.45 bln rupees of the 2031 gilt, while traders had expected the RBI to buy around 40 bln rupees of the gilt to cap the benchmark yield that has risen 7 basis points in a week, as of Wednesday’s close, dealers said.
“The cutoff itself was I think a few paise below where the market had pegged it, and then the fact that they barely took any quantum of the 10-year despite the yield rising over the past week, so we saw yield-hunting again from the trader side,” said a dealer at a state-owned bank.
The 6.10%, 2031 bond fell the most today after the auction result, as traders cited feeble demand from mutual funds and public-sector banks adding to the paper’s weakness. Additionally, investors trimmed their holdings ahead of the weekly gilt auction on Friday, which includes 130 bln rupees of the 2031 gilt, dealers said.
The 10-year benchmark 6.10%, 2031 bond ended at 99.10 rupees or 6.22% yield, as against 99.22 rupees or 6.21% yield on Wednesday.
Meanwhile, short-term gilts had fallen sharply earlier in the day because some traders saw the likelihood of a hike in the reverse repo rate by the RBI as early as October, following a steep cut-off set at its variable rate reverse repo auction on Tuesday, dealers said.
The RBI had set the cut-off for its seven-day variable rate reverse repo auction worth 2 trln rupees at the highest possible rate of 3.99% on Tuesday, which led traders to believe that the central bank might be hinting at nudging short-term rates higher, dealers said.
Meanwhile, at the 170-bln-rupee Treasury bill auction on Wednesday, cut-offs rose 11-21 basis points from the previous week.
According to reports, Citi also expects a possible hike of 15 basis points in the reverse repo rate in October, bringing forward its expectation of a hike in December.
All of these factors contributed to traders seeking higher yields on short-term gilts, as spreads with money market rates got squeezed, leading to a fall in the price, dealers said.
However, the 5.63%, 2026 gilt ended off lows as traders bought into the dip on the view that the central bank was unlikely to suddenly increase the reverse repo rate, while RBI officials continued to assure the market of monetary policy continuing on an accommodative path, dealers said.
“The buzz is there for the (reverse repo) rate hike, I just think it’s difficult for the RBI to justify one because there is such a gap between its actions and statements from RBI officials even in the recent past, so there are bets both ways and some will wait for clarity,” said a dealer at a private bank.
“The swap market has already seen plenty of paying and the pressure on short-term bonds will continue to be there if the money market starts pricing in normalisation.”
According to data on the RBI’s Negotiated Dealing System – Order Matching Platform, the market-wide turnover was 350.35 bln rupees, as against 328.60 bln rupees on Wednesday.
OUTLOOK
On Friday, government bonds are seen opening steady ahead of the result of the 240-bln-rupee weekly gilt auction.
Traders may trim holdings of the 6.10%, 2031 bond ahead of the auction to make room for fresh supply of the paper. The government has offered to sell 130 bln rupees of the benchmark 2031 bond at the auction.
Meanwhile, traders may avoid aggressive bets on short-term gilts after the cutoff at the RBI’s seven-day, 2-trln-rupee variable rate reverse repo operation on Tuesday was higher than expected, raising concerns that the central bank’s liquidity management measures would push up short-term rates.
Bond prices may have a tailwind following the lack of additional borrowing by the Centre in Oct-Mar, but any sharp movement in US Treasury yields and crude oil prices overnight may guide domestic bonds early in trade.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.19-6.25% on Friday.
India Gilts: Short-term gilts dn; mkt bets on early reverse repo hike
NEW DELHI–1220 IST–Shorter maturity gilts fell because some traders saw the likelihood of a hike in the reverse repo rate by the Reserve Bank of India as early as October, following the steep cut-off set at its variable rate reverse repo auction on Tuesday, dealers said.
The RBI had set the cut-off for its seven-day variable rate reverse repo auction worth 2 trln rupees at the highest possible rate of 3.99% on Tuesday, which led traders to believe the central bank might be hinting at nudging short-term rates higher, dealers said. Meanwhile, at the 170-bln-rupee Treasury bill auction on Wednesday, cut-offs rose 11-21 basis points from the previous week.
The shift in expectations comes as the US Federal Open Market Committee earlier this month hinted at a quicker-than-expected unwinding of its ultra-accommodative monetary policy measures. The market was of the view that despite the elevated levels of surplus liquidity in the banking system, the RBI was unlikely to hike the reverse repo rate till at least December, dealers said.
The reverse repo rate is at an asymmetric spread of 65 basis points below the repo rate of 4%, and the RBI is seen bringing it back to 25 basis points under the policy rate as part of its policy normalisation measures.
“The variable rate reverse repo result was seen as a strong signal, now the chatter has increased that the RBI may raise the reverse repo starting at the October policy (meeting) itself,” a dealer at foreign bank said.
According to reports, Citi now expects a possible hike of 15 basis points in October, bringing forward its expectation of a hike in December.
Meanwhile, long-term gilts could not hold onto to gains ahead of the result of the RBI’s 150-bln-rupee gilt purchase under the government securities acquisition programme, which included the 6.10%, 2031 bond and the 6.64%, 2035 bond.
Demand in the secondary market was weak as investor segments such as mutual funds – aggressive buyers in the first half of the month – were selling, likely due to redemption pressures at the end of the Jul-Sep quarter. Meanwhile, public sector banks also kept their trading books light at the quarter-end to preserve cash at hand, dealers said.
“The market is at a given, there is no demand and even the cut-offs at the government securities acquisition programme may see some undercutting among banks again, just like what happened with the 6.64%, 2035 bond last week,” a dealer at a private bank said.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.20-6.25% during the day. (Aaryan Khanna)
India Gilts: Steady before RBI G-SAP buy, 10-yr bond cutoff in focus
MUMBAI–1036 IST–Government bonds were steady as traders stayed on the sidelines before the Reserve Bank of India’s 150-bln-rupee gilt purchase auction under the government securities acquisition programme today, dealers said.
The central bank has offered to buy the 6.10%, 2031 paper, the 6.64%, 2035 paper and the 7.26%, 2029 paper at the gilt-purchase auction this week.
The auction assumes significance as it comes at a time when the yield on the paper has climbed 7 basis points over the last six days because of a rise in US bond yields and high crude oil prices.
Thus, the cutoff set by the RBI today at its gilt-purchase auction and the quantum that it buys would give cues to the market about where the central bank wants the yield on the 10-year paper to be in the near term, dealers said.
“Whether through OTs (Operation Twist), OMOs (Open market operation) or G-SAPs (government securities acquisition programme), the RBI in the previous quarter had been sending strong signals on its comfort with yields, especially on the 10-year paper,” said a dealer with a primary dealership.
“Now last auction didn’t matter much because overall sentiment seemed positive, but then suddenly global markets changed and the borrowing calendar came which showed higher supply of 10-year gilt in Oct-Mar, so the cutoff set would be very crucial today. Also, with talks of the RBI replacing G-SAP with OTs from October makes this auction very significant.”
Informist earlier this month had exclusively reported quoting a banking industry source that the RBI is likely to replace the asset purchase scheme with outright or special open market operations to manage the heavily excess liquidity in the banking system.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.20-6.25% during the day. (Nikhil Patwardhan)
India Gilts: Seen steady before result of 150-bln-rupee RBI G-SAP buy
MUMBAI – Government bonds may open steady because dealers may avoid large bets ahead of the Reserve Bank of India’s 150-bln-rupee gilt purchase auction under the government securities acquisition programme, dealers said. The RBI has also offered to sell three gilts worth 150 bln rupees today through an open market operation.
The central bank has offered to buy the two most-traded gilts–the 6.10%, 2031 bond and the 6.64%, 2035 bond–today as part of the balance 150 bln rupees of the government securities acquisition programme under which it had offered to buy 1.2 trln rupees worth of gilts in Jul-Sep.
The RBI had conducted a similar open market operation last week, but dealers said there were not many cues as the central bank did not buy the on-the-run 10-year benchmark paper aggressively. It had bought just a little over 23 bln rupees at the auction, against 50 bln rupees expected by the market, and that too at a lower-than-expected price.
This was in contrast with the previous 10-year benchmark–the 5.85%, 2030 bond–which the central bank used to buy aggressively at its gilt purchase auctions in a bid to anchor the yield on the paper, thus sending strong cues to the market.
Strong demand for on-the-run gilts due to positive global cues and top RBI officials’ assurances to the market of extending support for as long as necessary had led the RBI to not buy the 6.10%, 2031 paper aggressively and instead, buy more of the off-the-run 7.17%, 2028 gilt at the gilt purchase auction last week, dealers said.
Since then, however, US Treasury yields have hardened and crude oil prices have soared, which led to investors demanding higher yields on domestic bonds. The yield on the 10-year benchmark 6.10%, 2031 paper has jumped 7 basis points since last Thursday.
Moreover, the Centre released its borrowing calendar for Oct-Mar earlier this week and according to the calendar, it would raise 130 bln rupees on alternate weeks through the sale of 10-year papers in Oct-Mar, against 110 bln rupees in Apr-Sep.
While the borrowing calendar was a relief with the Centre refraining from borrowing more than the budgeted amount of 5.03 trln rupees, more supply of the 10-year paper led investors to demand higher yields. Analysts expect the 10-year paper to underperform shorter-tenure gilts in the near term.
Today’s gilt purchase auction, therefore, attains significance as dealers would closely watch the cut-offs set by the RBI, especially for the 6.10%, 2031 paper and the quantum that the central bank takes. If the RBI resorts to buying the gilt aggressively, it will send a strong signal to the market about the RBI’s discomfort with higher yields on the 10-year gilt, especially because a large quantum of the Centre’s borrowing in Oct-Mar is concentrated in this segment, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.20-6.25% during the day. (Nikhil Patwardhan)
End
US$1 = 74.23 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Mainak Moitra
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