Informist, Thursday, Dec 16, 2021
By Aaryan Khanna
NEW DELHI – Most government bonds closed steady today lacking cues, as the outcome of the US Federal Open Market Committee meeting on Wednesday was on expected lines, despite the US Federal Reserve making its largest move towards normalisation yet.
The Fed doubled the pace of its asset purchase taper to $30 bln every month starting January. The pace puts the last of the central bank’s purchases in February, with rate hikes likely to follow the end of the programme.
Additionally, members of the Fed projected interest rates rising thrice in 2022 by 25 basis points each, a sharp pace of unwinding policy accommodation to tame surging retail inflation in the world’s largest economy.
US CPI inflation hit 6.8% in November, the highest since 1982, after a print of 6.2% in October, which was the highest in three decades.
However, domestic gilt traders discounted the policy normalisation pace as US Treasury yields traded in a thin band, with the market anticipating the current pace of normalisation, dealers said.
Moreover, traders were also cautious ahead of the monetary policy statements to be detailed by the European Central Bank and the Bank of England later today, dealers said.
“We have nothing to trade on even after the policy announcement (in the US), because the (US Treasury) yields haven’t moved, and there’s no point positioning in the Indian market at these levels,” a dealer at a foreign bank said. “The other central banks may untether themselves from the US decision, but expectations are that all the developed economies will move in step during this unwinding process.”
Meanwhile, the benchmark 10-year 6.10%, 2031 fell ahead of its auction on Friday as traders placed short bets on the paper at what is expected to be its last auction, dealers said.
Today, the 10-year benchmark 6.10%, 2031 bond ended at 98.05 rupees or 6.37% yield, against 98.12 rupees or 6.36% on Wednesday.
The government was likely to issue a new 10-year bond soon as the outstanding in the 6.10%, 2031 paper approached 1.5 trln rupees after the fresh issuance this week, which has been the informal cap of borrowing in a single gilt, dealers said.
However, traders avoided large bets in a thin market even for the most-traded 6.10%, 2031 bond, with foreign banks keeping to the sidelines at the close of the calendar year and state-owned banks wary of large bets amid a two-day strike by staff in consumer-facing operations, dealers said.
Further, shorts were discouraged by dismal trading volumes and as the benchmark yield approached the psychologically-crucial 6.38% mark, dealers said.
“The 10-year yield isn’t going to break the level unless something changes fundamentally, there’s too much support in the 6.38-6.40% range,” a dealer at a state-owned bank said.
According to data on the RBI’s Negotiated Dealing System – Order Matching platform, the market-wide turnover today was 111.80 bln rupees against 140.15 bln rupees on Wednesday.
OUTLOOK
On Friday, government bonds may take open steady as traders avoid large bets ahead of the result of the 240-bln-rupee weekly gilt auction.
The government has offered to sell 130 bln rupees of the 6.10%, 2031 bond, 40 bln rupees of the floating rate bond 2034 and 70 bln rupees of the 6.95%, 2061 bond on Friday.
Traders may also take cues from the policy outcomes of the European Central Bank and the Bank of England later today.
The pace of unwinding monetary policy accommodation in the face of surging inflation globally may determine the direction gilts take amid lack of domestic cues, dealers said.
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 6.34-6.40%.
India Gilts: In thin bad amid low volumes ahead of weekly debt sale
NEW DELHI-– 1500 IST–Government bonds were confined to a narrow range amid muted trade volumes as traders refrained from placing large bets ahead of the 240-bln-rupee weekly gilt auction on Friday, dealers said.
The government will borrow 130 bln rupees through sale of the 6.10%, 2031 bond, 40 bln rupees through the FRB 2034 and 70 bln rupees through the 6.95%, 2061 bond on Friday.
Market participants looked past the US Federal Open Market Committee’s announcement of doubling its asset purchase tapering as it was largely in line with the expectations, which had built up after inflation touched a multi-decade high, dealers said.
“Last 15 days FPIs (foreign portfolio investors) and foreign banks have been absent from the market,” said a dealer with a primary dealership. “FPIs won’t be interested in the Indian market due to the current currency rates.”
The rupee has depreciated against the dollar in the past week to reach a 20-month low of 76.2300-a-dollar due to the dollar’s global strength leading up to the US FOMC meeting on Wednesday. The rupee has also suffered from global worries over nascent economic recovery due to the spread of the Omicron variant of COVID-19.
Meanwhile, some traders trimmed their holdings of the benchmark 10-year 6.10%, 2031 ahead of its auction on Friday and as the paper is expected to lose its benchmark status soon due to high outstanding, dealers said.
The net outstanding on the paper stands at 1.35 trln rupees. In the current financial year, the government has been observing an informal cap of 1.5 trln rupees for cumulative borrowing through a single dated security.
Moreover, traders were also cautious ahead of the monetary policy statements to be detailed by the European Central Bank and the Bank of England later today, dealers said.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.35-6.40%. (Shubham Rana)
India Gilts: Steady as market shrugs off faster asset taper by Fed
NEW DELHI–1035 IST–Government bonds were steady because the market shrugged off the US Federal Reserve’s announcement on faster tapering of asset purchases as it was factored in, following a surge in US inflation to a multi-decade high, dealers said.
The path of policy normalisation laid down by the Fed is largely in line with the expectations as can be seen with the muted response in the US Treasury yields, dealers said.
“The FOMC (Federal Open Market Committee) statement was largely in sync with what market was prepared for since (US) Oct CPI print, and Fed officials had already made it clear with their comments that such developments are likely to be part of the policy,” a dealer with a private bank said.
“The market seems comfortable in the current range and will need stronger cues to breakthrough, and if the US yields haven’t moved by much on their policy there is going to be little impact on domestic bonds as well,” the dealer said.
The market treaded with caution before the other major central banks such as the European Central Bank, Bank of England, and Bank of Japan, among others, deliver their monetary policy statement.
Investors expect these central banks to follow the Fed in an effort to address the elevated inflation, which poses a downside risk to the nascent economic recovery, while being cautious about the rapid rise in coronavirus cases in Europe, dealers said.
There is limited activity in the market, largely due to year-end. Bonds are likely to remain in a narrow range in the near-term as the market seeks clarity over the domestic monetary policy path and the fiscal situation towards the last quarter of the financial year, dealers said.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.35-6.40%. (Vaibhav Chakraborty)
India Gilts: Steady as US yields muted post FOMC statement
NEW DELHI – Government bonds are likely to open steady today because the US markets shrugged off the earlier-than-expected tapering of asset purchase announced by the Federal Open Market Committee.
To curb record-high inflation in the US, the FOMC is doubling the pace at which it was to taper its asset purchases, allowing them to hike interest rates earlier than expected.
The US central bank had previously emphasised that it would only move to hike interest rates once it wraps up the asset purchase programme necessitated by the economic impact of coronavirus pandemic.
Members of the US Fed also pencilled in three rate hikes of 25 basis points each in 2022, with the median forecast for the federal funds rates rising to 0.75-1.00%, according to projection materials released along with the policy statement. The median rate seen at the end of 2023 rose to the 1.50-1.75% band, forecasting three more rate hikes.
The US Treasury yields rose marginally, however, as investors are of the view that the policy statement was largely on expected lines as several Federal Reserve officials in the run-up ot the policy suggested accelerating the pace of tapering.
Traders are of the view that with the reaction on yields limited, Indian government bonds are likely to remain in a narrow range during the day. Traders may also exercise caution ahead of the crucial monetary policy meets of other key central banks.
The European Central Bank and the Bank of England, among others, are set to deliver monetary policies, which may also mark a shift away from the ultra-accommodative policy stance due to high inflation.
Even as these central banks look to chart their own monetary policy course independently, they are likely to approach it with caution over the fast-spreading Omicron variant of coronavirus.
Traders are of the view that since there is limited activity in the market, largely due to year-end, the bonds are likely to remain range bound in the near-term as market seeks more clarity over the domestic monetary policy path and the fiscal situation towards the last quarter of the financial year.
Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.35-6.40%. (Vaibhav Chakraborty)
End
US$1 = 76.09 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Pranav S. Joshi
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