Informist, Tuesday, Oct 26, 2021

By Aaryan Khanna

NEW DELHI – Government bonds ended on a mixed note in a thin trade, with the 10-year benchmark 6.10%, 2031 bond falling the most among on-the-run gilts after the Reserve Bank of India refrained from announcing a special open market operation on Monday.

A special open market operation, or 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 10-year benchmark 6.10%, 2031 bond ended at 98.11 rupees or 6.36% yield, against 98.20 rupees or 6.35% yield on Monday.

Traders had stocked up on gilts on Monday, particularly the 2031 bond and the 6.67%, 2035 gilt, to sell them to the RBI at a higher price at the open market operation. The two gilts are widely pegged to be the next ones to be selected by the central bank at its gilt purchases, as they have underperformed this month while being two of the most-traded papers.

At Monday's close, the yield on the 10-year benchmark 6.10%, 2031 gilt had risen 8 basis points since Oct 7, the day before the RBI discontinued its outright gilt purchases under the government securities acquisition programme. The central bank had been using the programme as a key tool to anchor yields on gilts in the first two quarters of 2021-22 (Apr-Mar).

Today, traders trimmed holdings since the central bank was now unlikely to buy gilts in the current week through the open market operation, dealers said.

"Whatever churn was going on was amplified by the low volumes throughout the day in all bonds, and the 10-year got hit right at the end where it gave up all of yesterday's (Monday) movement because there isn't an open market operation this week," a dealer at primary dealership said.

Meanwhile, gilts maturing in up to five years fell as traders trimmed their holdings, citing a rise in money market rates as well as the elevated rates the RBI paid banks to absorb excess liquidity in the banking system, dealers said.

The RBI set the cut-off at its seven-day, 2-trln-rupee variable rate reverse repo auction today at 3.99%. At its 12-day, 4.5-trln-rupee auction on Friday, the central bank had set a similar cut-off, 1 basis point below the repo rate of 4%.

Further, a rise in the short-term rates in the overnight indexed swaps market led traders to demand higher yields on short-term gilts, dealers said. The one-year OIS rate rose 3 basis points today to 4.31%.

"Short-term papers should remain range-bound, but overnight rates are much higher now, every one of the variable rate reverse repo rate cut-offs is coming around 4%, so that has to be factored in," 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 170.95 bln rupees today, against 201.40 bln rupees on Monday.

OUTLOOK

On Wednesday, gilts may open steady as dealers are likely to stay on the sidelines amid lack of significant domestic cues.

Moreover, dealers may avoid aggressive bets due to the recent volatility in gilt prices.

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.

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 6.33-6.40% on Wednesday.    

India Gilts: Down on lack of special OMO notice, rise in OIS

NEW DELHI--1335 IST--Government bonds were slightly lower amid thin trade because the Reserve Bank of India refrained from announcing a special open market operation after market hours Monday, dealers said.

Traders had bought into gilts on Monday anticipating the RBI to announce open market operations to cap yields, but they trimmed holdings since it would not come in the current week, dealers said.

Meanwhile, paying interest in overnight indexed swap rates led to both the one-year and five-year OIS rate shooting up by 5 basis points each at the day's high, weighing on gilts, dealers said.

"There was a sudden spike (in gilt yields) due to heavy paying in the swap market, but that has subsided a bit, so we are going back to the daily churn and open market operation disappointment," a dealer at a private bank said.

"There are barely any volumes today since crude and US yields are also quiet," the dealer said.

Losses were limited as traders kept to the sidelines due to a lack of significant cues. Further, some traders held onto their gilt holdings on the view that the RBI would announce an open market operation in the near term, dealers said.

After a fall in its price due to overnight indexed swap flows, investors stocked up the 6.10%, 2031 gilt as the 10-year benchmark yield approached the psychologically-crucial 6.37% level, dealers said.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.31-6.37% today.  (Aaryan Khanna)

India Gilts: Steady amid thin trade on lack of major domestic cues

MUMBAI--1020 IST--Government bonds were steady in thin trade because dealers preferred staying on the sidelines due to lack of significant domestic cues.

The market has digested the minutes of the Reserve Bank of India's latest monetary policy meeting, which many dealers said were on expected lines, even as members of the rate-setting panel flagged risks of high inflation in the near term due to a recent sharp uptick in global commodity prices led by crude oil.

However, bonds were slightly higher due to an overnight fall in US Treasury yields. Crude oil prices, too, were largely steady lending support to gilts, dealers said.

"The market seems to have digested that (Brent crude oil December futures) crude will remain in $84-86 band and it (crude oil) seems to have stagnated in this band for the last seven-odd days," said a dealer with a primary dealership.

"So today, I expect movement (in bonds) in a narrow band as no one would want to take aggressive positions given that there is a chance of the RBI intervening soon to anchor yields. This Friday's auction would be crucial as the RBI might suggest its comfort levels through cutoffs, and if at all, by devolving the 10-year paper."

The RBI on Monday after market hours said that the Centre would raise 130 bln rupees through the sale of the 10-year benchmark 6.10%, 2031 gilt on Friday.

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

India Gilts: Seen slightly dn on lack of RBI intervention to cap ylds

MUMBAI – Government bonds are seen lower today, albeit marginally, as the Reserve Bank of India refrained from announcing a special open market operation to cap the recent rise in yields. The bond market was expecting the central bank to announce one on Monday.

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.

Losses are seen limited as dealers will prefer staying on the sidelines due to lack of significant domestic cues. There will also be caution after the recent volatility, which saw yields on bonds, especially longer-maturity papers hardening, dealers said. 

The yield on the 10-year benchmark 6.10%, 2031 gilt has risen 8 basis points since Oct 7 after the RBI announced discontinuation of its outright gilt purchases under the government securities acquisition programme. The central bank had been using the gilt-purchase programme as a key tool to anchor yields on gilts in the first two quarters of 2021-22 (Apr-Mar).

Besides, a sharp rise in US Treasury yields and crude oil prices weighed on gilts during this period. Many in the market were of the opinion that the central bank would soon intervene if the yields keep rising by either buying gilts through Negotiated Dealing System-Order Matching segment or via open market operations. Consequently, traders covered their short bets on Monday anticipating RBI's intervention.

Some dealers also stocked up gilts in a bid to sell it to the RBI at a higher price at the open market operation. Most dealers expect the central bank to buy the 10-year benchmark 6.10%, 2031 gilt and the 6.67%, 2035 gilt, two among the most-traded papers, which have underperformed this month.

Meanwhile, a slight fall in US Treasury yields and largely steady crude oil prices would also lend support to domestic gilts, dealers said. Both the 10-year US Treasury yield and Brent crude oil December futures contract are still above psychologically-crucial levels.

The 10-year US Treasury yield ended slightly lower at 1.64% in choppy trade on Monday as investors remained uncertain over the pace that the US Federal Reserve would adopt in unwinding the ultra-loose monetary policy amid persistent high inflation. Meanwhile, Brent crude oil December futures ended at $85.99 per bbl, little changed from the previous close of $85.53 a barrel.

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

End

US$1 = 75.11 rupees

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

Edited by Akul Nishant Akhoury

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