Informist, Monday, Dec 4, 2023

By Nishat Anjum and Aaryan Khanna

MUMBAI – The yield on the 10-year government bond is expected to fall by the end of the month because of positive global cues, with a few hiccups on the domestic front setting a floor for yields, market participants said.

According to the median of estimates of 17 money managers, treasury heads, and economists polled by Informist, the yield on the 10-year benchmark 7.18%, 2033 bond at the end of the month is seen at 7.23%, against 7.28% on Nov 30. Today, the bond ended at 7.27%.
An easing rate view in the world's largest economy has given comfort to investors in both the US and India, pulling down US Treasury yields sharply from 16-year highs hit in October. Various US Federal Reserve officials, including Chair Jerome Powell, have hinted that rates have peaked in the US. This has led to Fed fund future traders betting on rate cuts as early as March.

US rate futures on Friday priced in a 53.4% chance of a rate cut by the March meeting, according to the CME's FedWatch tool. By the May meeting, only 13% of the traders expect rates to remain unchanged. Further hints about a potential pivot are expected at the upcoming Federal Open Market Committee meeting, scheduled on Dec 12-13.

The current federal funds target range is 5.25-5.50%, which has remained unchanged since its July policy decision. Close to 98% of Fed funds futures traders expect a status quo policy.

Another comfort on the global front is the fall in crude oil prices, participants said. Unlike in November, uncertainty over oil prices due to geopolitical tension in West Asia and supply cuts have eased, with crude prices falling below the psychologically crucial level of $80 per barrel. A rise in crude oil prices increases the risk of imported inflation.

Last week, the Organization of the Petroleum Exporting Countries and its allies agreed to extend the voluntary oil output cuts announced earlier this year, but the quantum fell short of market expectations, pulling crude futures down by more than 2%.

Today, Brent crude for February delivery fell as low as $77.66 a bbl, from $81.06 per bbl at close of the Indian market on Friday.

The easing of rate view in the US has cemented the view that the Reserve Bank of India's Monetary Policy Committee is also done with rate hikes. In the upcoming three-day meeting, starting Wednesday, the panel is expected to maintain status quo as well. Currently, the repo rate stands at 6.50%, with the policy stance of "withdrawal of accommodation".

Respondents to the Informist poll do not expect the RBI to go ahead with the open market operation - sales via auction in December, which would keep upward pressure on bond yields in check. After the policy meeting in October, bond yields had surged on the fears of OMO sale auctions, and further clarity is expected from the central bank at this meeting.

This month, market participants do not see liquidity in the banking system to be in surplus sustainably, dealers said. This, in turn, has led to bets of the central bank not conducting OMO sale auction.

Even as the 7.68%, 2023 bond matures on Dec 15, which would add 788.34 bln rupees to banking system liquidity, it would be offset by outflows on account of advance tax payment for the December quarter, respondents said.

If the central bank does not mention OMO auctions in the upcoming policy, that may spur additional gilt buys and pull yields slightly lower, respondents said.

"The RBI's policy announcements are typically applicable from one meeting to the next," said Vikas Goel, managing director and chief executive officer of PNB Gilts, a primary dealership. "Unless the governor reiterates it (OMO sales via auction), the timing for that has expired."

Despite positive cues globally and back home, the fall in bond yields may be limited as there are concerns over bond supply pressures and an uptick in CPI inflation.

The rise in the quantum of state government loans in this quarter has weighed on gilts, as investors increasingly opted for state loans with a lucrative yield spread. This hampered the demand for gilts. In the last auction on Tuesday, 17 states raised 358 bln rupees through bond sales, against the 295 bln rupees notified in the indicative calendar for Oct-Dec's borrowing.

So far in the December quarter, states have borrowed 1.78 trln rupees via bonds, against the indicated amount of 1.51 trln rupees.

The CPI inflation print for November is seen near 6%, and is another factor why yields are not seen lower at year-end. The data is scheduled for release on Dec 12. The CPI inflation reading for December is expected to top the RBI's 2-6% comfort band. Though both readings are factored in, they make a case for delaying any potential rate cuts the rate-setting panel would consider, which makes it difficult for the 10-year yield to fall below 7.20%, respondents said.

"If you can get yield on cash for close to 8%, then investing in government securities needs to be compensated in some way, and if you are not going to get that in yield, you should get that in price," said R. Sivakumar, head – fixed income at Axis Mutual Fund. "The price action is getting delayed as the RBI is remaining hawkish on that front."

One of the seasonal factors that is likely to play out is diminished activity in the secondary market as foreign banks and investors close their books at the year-end. Under the general category and fully accessible route, investors bought 618 bln rupees of government bonds in November, according to data with Clearing Corp of India.

These flows are likely to dry up during December, with further inflows on account of India's inclusion in JP Morgan's emerging market debt index likely only in Jan-Mar, respondents said.

Following are the estimates for yield levels/range in percentage for the 10-year benchmark bond at the end of December:

End

US$1 = 83.37 rupees

(With inputs from Anupreksha Jain, M.C. Adhiinthran, and Siddhi Chauhan)

Edited by Ashish Shirke

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