Informist, Wednesday, Oct 27, 2021

By Aaryan Khanna

NEW DELHI – After a late surge, government bonds ended higher led by gilts of longer maturities, tracking a fall in US Treasury yields and crude oil prices.

The 10-year benchmark 6.10%, 2031 bond ended at 98.30 rupees or 6.34% yield, against 98.11 rupees or 6.36% yield on Tuesday.

The Brent crude oil futures contract for December settled slightly higher on Tuesday, but was 1% down at $85.50 per bbl at the end of Indian market hours today. Early reports today suggested that US crude oil stockpiles had risen over the past week, leading to prices easing below the psychologically-crucial $86-per-bbl mark.

The fall in crude oil prices leads to lower imported inflation for large consumers of crude like India, thus giving the Reserve Bank of India more room to prolong its ultra-accommodative policy support.

Meanwhile, the yield on the 10-year US Treasury note was down 4 basis points at 1.59% at the end of market hours, crucially below the 1.60% yield eyed by domestic traders, dealers said.

A fall in US Treasury yields widens the interest rate differential between the safe-haven asset and emerging market debt, making the latter more appealing for foreign investors.

"I feel a majority of the late movement was based on US yields easing past 1.60%, which means there is potential for foreign inflows before the Federal Open Market Committee meeting next week, and crude also supported the long-end," a dealer at a foreign bank said.

Some traders speculated mutual fund buying interest leading to the sharp rise in bonds maturing in 2035, dealers said. Traders stocked up on the 6.67%, 2035 bond in place of the 6.10%, 2031 paper as the 10-year benchmark is up for auction this Friday.

The 6.67%, 2035 bond does not have any fresh supply scheduled for next week, leading to traders making short bets on the 6.10%, 2031 bond while picking up the longer-maturity gilt, dealers said.

Earlier in the day, gains in the gilts were more circumspect before traders stepped up purchases on global cues, dealers said.

Traders also propped up gilt prices in longer maturities on the view that the RBI would soon intervene in the market to cap rising yields by announcing a special open market operation, dealers said.

A special open market operation, also known as Operation Twist, entails simultaneous purchase and sale of gilts of the same quantum. Typically, the central bank buys longer-maturity papers and sells shorter-maturity ones to anchor yields on long-term gilts.

However, some dealers were of the opinion that an intervention by the central bank was unlikely unless the 10-year benchmark yield breached 6.37%, which it has held for two days in a row, and moves towards 6.40%. Investors stepped up purchases earlier today at the psychologically-crucial 6.37% mark, making up early losses in the 2031 gilt.

Meanwhile, Informist exclusively reported earlier today, citing a banking source, that the RBI was considering announcing a 28-day variable rate reverse repo operation this week, potentially as early as today. The increase in the tenure of the reverse repo operations was flagged by RBI Governor Shaktikanta Das in his statement after the October monetary policy review.

The report kept traders from making aggressive bets on short-term gilts, with the 5-year benchmark 5.63%, 2026 gilt lagging gains by other on-the-run gilts. After market hours today, the RBI announced that it would conduct a 28-day, 500-bln-rupee variable rate reverse repo auction on Tuesday.

"Even though the report said the duration would be hiked, the market was waiting for a quantum and other details to make moves, since money market rates have already corrected and there's been no noticeable impact yet on the 5-year benchmark yield," 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 was 310.00 bln rupees today, against 170.95 bln rupees on Tuesday.

OUTLOOK

On Thursday, gilts may open slightly lower, particularly those maturing up to 5 years, after the RBI announced after market hours today it would conduct a 28-day, 500-bln-rupee variable rate reverse repo auction on Tuesday.

The increase in tenure of the RBI's variable reverse repo rate operations may be seen as a step towards policy normalisation, thus driving short-term gilt yields higher as well, dealers said. 

However, losses are seen limited in long-term gilts as traders eye the announcement of a special open market operation by the central bank, which may come after market hours on Thursday, dealers said.

The 10-year benchmark 6.10%, 2031 bond may lag other long-term gilts due to fresh supply this week, as the government has offered to sell 130 bln rupees of the paper at the weekly gilt auction on Friday.

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

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.38% on Thursday.    

India Gilts: Long-term gilts up on easing crude, mutual fund buys

NEW DELHI--1340 IST--Government bonds in longer maturities rose sharply tracking an intraday fall in crude oil prices, reducing fears of import-led inflation into the domestic economy.

The Brent crude oil futures contract for December was down more than $1 in trade today at $85.27 per bbl, firmly below the psychologically-crucial $86-per-bbl mark. The fall in crude oil prices leads to lower imported inflation for large consumers of crude like India, thus giving the Reserve Bank of India more room to prolong its ultra-accommodative policy support.

"This is just a churn and some mutual fund buying. It's mostly positive today because of the fall in crude, but it could quickly turn flat since there is no bullish sentiment or news," a dealer at a private bank said.

Some traders speculated mutual fund buying interest leading to the sharp rise in bonds maturing in 2035, dealers said. Traders stocked up on the 6.67%, 2035 bond in place of the 6.10%, 2031 paper as the 10-year benchmark is up for auction this Friday.

The 6.67%, 2035 bond does not have any fresh supply scheduled for next week with markets shut for Diwali, leading to traders making short bets on the 6.10%, 2031 bond while picking up the longer-maturity gilt.

Traders stepped up purchases in the 6.10%, 2031 bond after a fall early in the day after the benchmark yield topped the psychologically-crucial 6.37% mark. However, gains were limited as the government has offered to sell 130 bln rupees of the paper at auction on Friday. 

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.38% today.  (Aaryan Khanna)

India Gilts: Steady in thin trade on lack of significant domestic cues

MUMBAI--1000 IST--Government bonds were steady in thin trade because dealers preferred to stay on the sidelines due to lack of significant domestic cues.

While an overnight rise in crude oil prices weighed on gilts, dealers avoided aggressive bets due to the recent volatility and in anticipation that the Reserve Bank of India would intervene in the bond market to cap the recent rise in yields.

Crude oil prices inched higher on Tuesday to settle at the highest level since 2014, driven by supply shortages and strengthening demand for oil in the US. High crude oil prices lead to a higher import bill for India, the world's third-largest consumer of crude oil, thus leading to elevated inflation and giving the RBI less room to extend its policy accommodation.

The market is now keenly waiting for the central bank to intervene either through the Negotiated Dealing System-Order Matching segment or via open market operations to get clarity over the trajectory of yields in the near term. The cutoffs that the central bank sets at the open market operations, if it conducts one, and the quantum that it takes would give further cues to the market on where the RBI wants yields on gilts to be, dealers said. 

Bonds are expected to trade in a narrow band for the rest of the day and volumes are likely to remain low.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.40% today.  (Nikhil Patwardhan)

India Gilts: Seen steady due to lack of significant domestic cues

MUMBAI – Government bonds are seen steady today and trade volumes are expected to remain low because dealers may avoid aggressive bets due to lack of significant domestic cues. Moreover, dealers may remain on the sidelines post the recent volatility.

Lack of intervention by Reserve Bank of India to cap rising bond yields either through the Negotiated Dealing System-Order Matching segment or open market operations has left certain sections of the market puzzled as dealers are uncertain about the trajectory of yields in the near-term.

The central bank was using open market operations as a key tool in the first two quarters to anchor yields. The RBI would indicate its comfort levels through the cutoffs that it set and the quantum that it used to take at the open market purchase auctions.

However, the central bank opted to discontinue its outright gilt purchases plan--the government securities acquisition programme--it had started in April, from October.

But dealers were expecting the RBI to conduct open market operations either special or outright gilt purchases or intervene via the Negotiated Dealing System-Order Matching segment to anchor yields. Most dealers were expecting the central bank to conduct a special open market operation this week, but the RBI refrained from announcing one.

A special open market operation, also known as Operation Twist, entails simultaneous purchase and sale of gilts of the same quantum. Typically, the central bank buys longer-maturity papers and sells shorter-maturity ones to anchor yields on long-term gilts.

The hope of the central bank intervening in the bond market to cap rising yields had limited losses in gilts since last week, dealers said, as traders had covered their short bets expecting prices to not fall further if the RBI was to intervene.

Moreover, some had stocked up the gilts that were most likely to be included in the open market purchase operation by the central bank--the 6.10%, 2031 and the 6.67%, 2035--in a bid to sell it to the RBI at a higher price at the open market purchase auction.

However, some dealers believe the RBI would wait for global factors such as the US Treasury yields and crude oil prices, which have been volatile over the last three weeks, to stabilise before intervening in the bond market. 

Yield on the 10-year US Treasury note has been near a multi-month high and above the psychologically-crucial mark of 1.60% for the past six days now. While the yield has not been very volatile this week, dealers expect it to stabilise only after the Federal Open Market Committee's meeting outcome, scheduled early next month.

Meanwhile, just when dealers thought crude oil prices would also stabilise as the December futures of Brent crude were confined to a narrow band of $84-$86 a barrel for nearly two weeks, the contract topped the $86 a bbl on Tuesday to settle at a new 52-week high of $86.40 a bbl. Today, it was largely steady in early trade. But dealers expect it to weigh on gilts.

Moreover, the 10-year benchmark 6.10%, 2031 bond may remain under pressure due to fresh supply this week, as the government has offered to sell 130 bln rupees of the paper at the weekly gilt auction on Friday.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.40% today.  (Nikhil Patwardhan)

End

US$1 = 75.03 rupees

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

Edited by Shirsha Thakur

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