Informist, Monday, Oct 11, 2021

By Aaryan Khanna

NEW DELHI – Government bonds ended lower on the view that surging crude oil prices could pass through to domestic markets and fuel higher consumer inflation, even as the market awaited the release of the CPI inflation print for September, dealers said.

The 10-year benchmark 6.10%, 2031 bond ended at 98.26 rupees or 6.34% yield, against 98.42 rupees or 6.32% yield on Friday.

The Reserve Bank of India projected Jul-Sep consumer inflation to average 5.1%, with an imputed reading of 4.4% for September. The government will release CPI data for September at 1700 IST on Tuesday. A poll of 19 economists by Informist pegged the inflation print at 4.5%.

While the benign print is well within the central bank's tolerance band of 2-6%, the RBI factors in crude prices of $75 per bbl. Today, Brent crude oil futures for December delivery traded close to the psychologically crucial $84-per-barrel mark at the end of Indian market hours.

Crude prices jumped on Friday and continued to be higher today, as a supply-demand mismatch grew with global economic activity firmly recovering from the COVID-19 pandemic. Traders were of the view that upcoming inflation prints could be sharply higher, with crude prices close to or above $80 per barrel since the beginning of October, dealers said.

Even at attractive yields, investors avoided stepping up purchases of long-term gilts as the RBI refrained from announcing a fresh round of the government securities acquisition programme on Friday, dealers said. With no soft cap on yields by the RBI's gilt purchases, some traders looked for higher yields by churning their existing stock, dealers said.

"The 10- and 14-year papers will have the most supply in Oct-Mar, and absolutely no scheduled buying means the RBI has removed its hand from the balance temporarily, so traders can go after yields aggressively when crude, US yields and inflation concerns are so heavy," a dealer at a foreign bank said.

Additionally, a surge in the 10-year US Treasury yield over the last week by 12 basis points to 1.61% on Friday led to traders avoiding aggressive bets on gilts, anticipating weak demand from foreign portfolio investors, 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.

According to data on the Clearing Corp of India's website, overseas investors have turned net sellers of gilts in October, and sold 5.8 bln rupees of gilts today cumulatively under the general limit and the fully accessible route.

In September, FPIs had bought over 76.36 bln rupees of gilts cumulatively under the general limit and the fully accessible route, the most in 2021.

"It's only public sector banks which are in a buying mood, and we know where that mood is coming from, otherwise there are no investors in the market from the mutual fund or FPI side," a dealer at a private bank said.

While long-term gilts fell again after a sharp slump on Friday, losses were limited in short-term gilts as rising inflation concerns were being priced into bonds of longer maturities, dealers said.

Further, the five-year benchmark 5.63%, 2026 bond was supported by the RBI setting the cut-off along expected lines at its Friday auction, and refraining from increasing the tenure of its variable rate reverse repo operations in the past 14 days, indicating it would not ramp up its scheduled liquidity management operations.

According to data on the RBI's Negotiated Dealing System – Order Matching Platform, the market-wide turnover was 281.60 bln rupees, against 480.50 bln rupees on Friday.

OUTLOOK

On Tuesday, gilts are seen opening steady as dealers may avoid large bets due to the recent volatility.

Further, traders may stay on the sidelines ahead of the release of the CPI print for September, which is scheduled after market hours on Tuesday.

The 6.10%, 2031 gilt may remain under pressure ahead of its likely auction on Thursday, especially with the central bank refraining from announcing outright gilt purchases in October. The paper was seen as a candidate by many dealers in the central bank's next round of gilt purchases.

Shorter-tenure gilts may outperform longer maturities as the RBI refrained from announcing a hike in the reverse repo rate and did not extend the duration of its variable rate reverse repo operation.

Any sharp movement in US Treasury yields and crude oil prices overnight may guide domestic bonds early in trade.

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.37% on Tuesday.

India Gilts: Mixed; long-term gilts dn as inflation fears weigh

NEW DELHI--1405 IST--Government bonds traded on a mixed note today with long-term gilts lower, tracking an overnight jump in crude oil prices that stoked fears of inflation passing from fuel prices to the broader consumer economy, dealers said.

While the September CPI inflation print, due after market hours Tuesday, was likely to remain under the Reserve Bank of India's upper bound of 6%, traders trimmed their holdings on the view that elevated prices of global commodities including crude would hamper inflation figures in following months, dealers said.

According to the RBI's projections of 5.1% consumer inflation in Jul-Sep, the central bank's imputed projection for consumer inflation for the previous month was 4.4%. However, the RBI's projections rely on a $75 per barrel cost of crude oil, whereas the Brent crude oil futures contract for December threatened to the breach the psychologically-crucial $84-per-barrel mark today.

Inflated commodity prices, including those of coal, could also lead to a slowdown in power generation and threaten nominal growth. Traders were concerned that the Centre's buoyant tax collections – which have outperformed its budgeted estimates so far this fiscal – may also come under pressure, dealers said.

"Yes, growth is also a concern, plus the obvious inflation increase in the coming months because of the rise in crude, in fact it is a part of a supply-demand problem around the world and it is just now hitting India," a dealer at a state-owned bank said. "We'll have to see if this energy shortage would be dealt with quickly, otherwise nominal growth and therefore tax revenues could be hit later on."

Meanwhile, short-term gilts were in a thin band as rising inflation concerns were being priced into long-term gilts, dealers said. Further, the five-year benchmark 5.63%, 2026 bond was supported by the RBI setting the cut-off at its Friday auction along expected lines, and refraining from increasing the tenure of its variable rate reverse repo operations in the past 14 days.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.35% today. (Aaryan Khanna)

India Gilts: Down tracking sharp rise in crude oil prices, US yields

MUMBAI--1025 IST--Government bonds were lower tracking a sharp rise in crude oil prices and US Treasury yields, dealers said. Losses, however were limited because dealers exercised caution due to the recent volatility and the upcoming CPI inflation data for September, which will be released after market hours on Tuesday.

Crude oil prices ended last week with 4% gains as worries over supply demand mismatch continued to deter traders. A rise in crude oil prices leads to a higher import bill for large consumers of crude, like India, thus leading to inflationary pressures and giving the Reserve Bank of India less room to extend its ultra-accommodative policy support.

The Brent crude oil futures contract for December delivery ended higher for the second-day and settled at $82/bbl on Friday. The contract further soared today and topped the psychologically crucial mark of $83 a barrel. It was last at $83.60. Meanwhile, the 10-year US Treasury yield, too was above the psychologically-crucial mark of 1.60%, a level seen only in early June, narrowing the interest rate differential between the safe-haven asset and emerging market debt, and thus making the latter less attractive for foreign investors. 

The CPI inflation data for September attains significance as investors would closely monitor the impact of the recent surge in global commodity prices on the print. The RBI also cut its CPI inflation estimates for 2021-22 (Apr-Mar) by 40 basis points at its monetary policy review last week, erasing much of the upward revision it announced in August.

"The September inflation data would be very crucial as it comes amidst a lot of things--fears of some sort of liquidity normalisation after Friday's policy, sharp rise in crude oil and other commodity prices and the RBI lowering its inflation estimates," said a dealer with a private bank.

"Till then, I expect lacklustre trade, especially after the sell-off we saw on Friday."

The 6.10%, 2031 and the 6.67%, 2035 papers were the worst hit so far after the RBI announced discontinuation of its outright gilt purchases under the government securities acquisition programme. The two gilts were likely to be included in the central bank's outright gilt purchases under the programme.

The most traded five-year gilt, however, was only marginally down as the RBI did not announce longer-tenure variable rate reverse repo operations on Friday and hike in reverse repo rate, which the market had feared. Moreover, the cutoff set by the RBI at the paper's 60-bln-rupee auction on Friday was on expected lines, which lent support to the gilt.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.35% today. (Nikhil Patwardhan)

India Gilts:Seen steady post recent volatility; global cues may weigh

MUMBAI – Government bonds are seen steady today because dealers may avoid large aggressive bets after the recent volatility. However, a surge in crude oil prices and US Treasury yields may weigh on domestic bonds, dealers said.

Longer-maturity bonds had fallen sharply on Friday after the Reserve Bank of India announced the discontinuation of its government securities acquisition programme. Most market participants expected the RBI to taper down its gilt purchases under the programme, but very few had anticipated a total discontinuation of it. The most-traded 10-year and 14-year gilts, which were likely to be included in RBI's outright gilt purchases under the plan, thus fell sharply.

However, the shorter-tenure gilts remained supported as RBI did not hike the reverse repo rate--something many in the market had feared. The RBI also refrained from announcing any hike in its duration of variable rate reverse repo operations. The RBI said it will continue with its 14-day variable rate reverse repo operations, albeit with a larger quantum, while the market was wary of even a 56-day tenor variable rate reverse repo operation.

Thus, shorter-tenure gilts may remain supported even today. Moreover, the cutoff set by the RBI on the most-traded five-year gilt-- the 5.63%, 2026 paper--at its auction on Friday was on expected lines, which may continue to lend it support.

On the global front, crude oil prices rose for the second day on Friday and ended the week with nearly 4% gains, which may weigh on domestic prices, dealers said. NYMEX December futures topped $80/barrel for the first time since October 2014. The Brent Crude oil futures contract for December delivery ended at $82.39 a bbl after having topped the psychologically-crucial mark of $83/bbl intraday.

Typically, a rise in crude oil prices leads to higher imported inflation for large consumers like India, thus giving the Reserve Bank of India less room to prolong its ultra-accommodative policy support.

US Treasury yields also rose despite the lacklustre jobs report for September because investors continued to dump bonds after employment data for August was revised upwards, prompting some analysts to say that the September data was not as bad as it would have been otherwise.

The US economy added 194,000 jobs in September, well below economists' expectations of 500,000. The 10-year US Treasury yield had fallen initially reacting to the jobs report, but ended higher as the upward revision for August jobs data aggravated fears that the US Federal Reserve could well begin tapering its extensive policy support by as early as November. The yield topped the psychologically-crucial mark of 1.60% and ended at 1.61%.

The 10-year US Treasury yield rose 12 basis points over the last week, which will continue to weigh on the minds of foreign investors, dealers said, as 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.

However, losses may be limited and dealers may exercise some caution ahead of the CPI inflation data for September which will be released after market hours on Tuesday.

The Reserve Bank of India, in its monetary policy review statement last week, slashed its CPI inflation forecast for 2021-22 (Apr-Mar) by 40 basis points to 5.3%, erasing much of the upward revision it announced in August. This was despite global commodity prices being on the rise in recent weeks. Dealers will keenly monitor the CPI inflation print for September to see whether the recent rise in commodity prices has had an impact on it.

Meanwhile, dealers may trim holdings in the 10-year benchmark gilt ahead of the 130-bln-rupee auction of the paper on Thursday. Lack of the RBI's outright purchase of the gilt with the discontinuation of the government securities acquisition programme could prompt dealers to demand higher yields on the paper until the RBI indicates its tolerance levels through open market operations, dealers said.

Some dealers may also take an opportunity to buy the 6.67%, 2035 paper at lower prices after the bond had fallen sharply on Friday and was the worst hit paper among on-the-run gilts.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.25-6.35% today. (Nikhil Patwardhan)

End

US$1 = 75.36 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Avishek Dutta

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