Informist, Tuesday, Sep 28, 2021

By Aaryan Khanna

NEW DELHI – Government bonds ended on a mixed note today after a volatile day of trade as a surge in crude oil prices and US Treasury yields offset gains from the Centre refraining from borrowing extra in Oct-Mar.

Short-term bonds closed slightly higher, the biggest gainers from the lack of additional borrowing, while longer-dated securities fell towards the end of trade after banks did not tender the entire amount at Reserve Bank of India's seven-day, 2-trln-rupee variable rate reverse repo operation.

The 10-year benchmark 6.10%, 2031 bond ended at 99.06 rupees or 6.23% yield, as against 99.20 rupees or 6.21% yield on Monday.

The central government, in a release on Monday, said it would borrow only the budgeted amount of 5.03 trln rupees in the remainder of 2021-22 (Apr-Mar) through the issuance of dated securities.

This would include the borrowing expected to bridge the shortfall in the goods and services tax cess collections it owes to states, the Centre said, reducing the expected supply pressure on the market, particularly in short-term gilts where the GST borrowing was seen to be concentrated.

"Yes, the market was all set for a relief rally today, since the calendar ensures demand-supply is set to be in line (with expectations) for at least the next few months, but the global cues ruined it," a dealer with a private bank said.

An overnight surge in crude oil prices and US Treasury yields that continued today put pressure on domestic gilt prices and capped gains. The Brent crude oil futures contract for November delivery was firmly above the psychologically-crucial $80-per-barrel mark during market hours today, and was at $80.23 per barrel at the close.

Meanwhile, yield on the 10-year US Treasury note neared a three-month high and surged as much as 7 basis points from its Monday close to 1.55%, before settling at 1.52% at the end of Indian market hours.

As gilts came off highs, tracking the yield on the 10-year US Treasury note breaching 1.50% for the first time since June, traders avoided large bets on gilts. 

The tipping point for the market to slide came from the outcome of the RBI's 2-trln-rupee reverse repo operation, double the amount from previous weeks, dealers said.

The RBI set a cutoff of 3.99%, the highest possible cutoff at 1 basis point below the repo rate, at the auction, while accepting all bids of 1.97 trln rupees. While the 5.63%, 2026 bond held on to moderate gains, long-term gilts fell into the red.

Some traders ascribed the weakness to a one-off avoidance of the reverse repo by public-sector banks, typically the largest depositors, ahead of the closing of bank books for the Jul-Sep quarter.

However, the market may be more cautious as the cash-on-hand available for banks to bet on short-term gilts was seen restricted by the RBI's enhanced liquidity operations, dealers said.

The cutoff was seen by traders as a signal from the central bank that overnight rates, which have hovered close to the reverse repo rate of 3.35% instead of the RBI's policy repo rate of 4%, could trend higher, even before the RBI clarifies its stance after its next monetary policy review on Oct 6-8, dealers said.

"Since last week's auction was also under-subscribed, it could lead to a major repricing of the entire short-end, and more adventurous variable rate reverse repo bids from traders in the next one even above the 3.61% weighted average" 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 528.35 bln rupees, as against 303.70 bln rupees on Monday.

OUTLOOK

On Wednesday, government bonds may open steady on the back of recent volatility.

Traders' focus is seen on the reaction in overnight rates on Wednesday after the cutoff at the RBI's seven-day, 2-trln-rupee variable rate reverse repo operation was higher than expected. Any jump in short-term rates could add selling pressure to short-term gilts.

Bond prices may consolidate if crude oil prices and US Treasury yields reverse their sharp gains over the last few days, as these factors have driven down prices of gilts, which were seen higher following the lack of additional borrowing by the Centre in Oct-Mar.

The 10-year benchmark 6.10%, 2031 bond and the 6.64%, 2035 bond may trade on a positive note in the run-up to the RBI's next bond purchase under the government security acquisition programme on Thursday, which includes both gilts.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.19-6.26% on Wednesday.

India Gilts: Rise; surge in US yields, crude oil prices caps gains

NEW DELHI--1405 IST--Government bonds rose because the Centre refrained from borrowing extra in Oct-Mar to compensate states for a shortfall in goods and services tax cess collections, keeping its borrowing to the budgeted amount of 5.03 trln rupees.

The 5-year benchmark 5.63%, 2026 bond rose the most among on-the-run gilts as traders stepped up purchases, since the threat of additional borrowing, which was seen concentrated in short-term gilts, had subsided, dealers said.

Meanwhile, the 6.10%, 2031 bond and 6.64%, 2035 bond held on to gains after having been in red earlier in the day, as traders stocked up on the long-term gilts to offload to the Reserve Bank of India at its next gilt purchase worth 150 bln rupees under the government securities acquisition programme on Thursday.

However, an overnight surge in crude oil prices and Treasury yields that continued today put pressure on domestic gilt prices, and capped the gains.

"Again, the major hitch right now is the global factors, with both crude and US Treasury yields soaring and unlikely to reverse in the immediate term, which could mute all the optimism over the (bond buy) auction on Thursday," said a dealer at a private bank.

Brent crude oil futures contract for November traded firmly above the psychologically-crucial $80-per-bbl mark as supply constraints mounted, and traders expected crude prices to consolidate within the $80-$82 per bbl range for the week, instead of a sharp reversal in price, dealers said.

Moreover, the yield on the 10-year US Treasury note breached the 1.50%-mark for the first time since June, and was at 1.53%, up 5 basis points from Monday's close.

Traders were concerned that elevated US Treasury yields would drive away foreign portfolio investors, who had been aggressively adding Indian gilts and buoying prices since August, dealers said.

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.17-6.25% during the day.  (Aaryan Khanna)

India Gilts: Up as govt refrains from GST-linked extra borrow Oct-Mar

MUMBAI--1119 IST--Government bonds rose, led by shorter tenure papers, because the government refrained from announcing any additional borrowing to compensate states for the shortfall in goods and services tax compensation cess collections during Oct-Mar, dealers said.

The Centre released its borrowing calendar for the second half of 2021-22 (Apr-Mar) after market hours on Monday. According to the calendar, the Centre will only borrow the budgeted amount of 5.03 trln rupees. In May, the government had announced it would borrow 1.59 trln rupees more to meet the GST cess shortfall to states.

But the government on Monday said the borrowing projections for the second half also factor in the requirements for release of balance amount to states on account of back-to-back loan facility in lieu of GST compensation during the year.

The additional borrowing was expected to be concentrated in shorter-tenure segments, because of which dealers had trimmed holdings of the most-traded five-year paper, the 5.63%, 2026 gilt, over the last two weeks. However, with no extra borrowing seen in Oct-Mar, the paper was the best-performing gilt so far today.

In initial trade, gains in the 6.10%, 2031 paper, however, were limited as the calendar showed the Centre would raise 130 bln rupees at its weekly gilt auction in the gilt, against 110 bln rupees it had been raising in Apr-Sep. Moreover, the 10-year and 14-year papers put together would contribute over 45% of the Centre's borrowing in Oct-Mar, against around 37% in Apr-Sep.

The 10-year benchmark paper went on to gain as traders covered short bets on the paper ahead of the Reserve Bank of India's purchase of it under the government securities acquisition programme on Thursday. 

A sharp overnight rise in crude oil prices was also seen limiting gains in domestic bonds, dealers said.

Crude oil prices have surged due to fears of tight supply amid a pickup in demand. The Brent crude oil futures contract for November delivery topped the psychologically-crucial mark of $80/bbl in early Asian trade today. The contract is trading at its highest level since October 2018. 
 

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.18-6.25% during the day.  (Nikhil Patwardhan)

India Gilts: Seen up as no additional borrowing in Oct-Mar

MUMBAI – Government bonds are seen opening higher today after the government refrained from announcing any extra borrowing in Oct-Mar, related to the goods and services cess compensation shortfall to the states.

The lack of extra supply of dated securities comes as a relief for the market, which has absorbed a back-breaking load of bond supply in the previous and the ongoing financial year.

After market hours on Monday, the government announced that it would borrow the remainder of 5.03 trln in Oct-Mar out of the budgeted 12.05 trln rupees projected for the current financial year. 

Moreover, the Centre said that the borrowing projections for the second half also factors in the requirements for release of balance amount to states on account of back-to-back loan facility in-lieu of GST compensation during the year.

Informist exclusively had reported earlier this month, quoting a banking source, that the Reserve Bank of India has told the Centre that it may not need to borrow more at all. Thus, the market was expecting the Centre to not borrow any additional amount, dealers said.

However, dealers may now step up their purchases of gilts, especially the short-term bonds due to clarity on the borrowing of Oct-Mar as the additional borrowing was expected to be concentrated in the shorter-tenure segment. 

Short-term bonds, today, thus are seen sharply higher also because according to the borrowing calendar, the weekly supply of 5-year gilts is 60 bln rupees, sharply below 100 bln rupees that the Centre borrowed during Apr-Sep.

Quanteco Research, in a note, said that yield on the five-year paper could drop approximately 10 basis points due to lower scheduled issuances. The paper also noted that higher borrowing from National Small Savings Fund as well as higher states’ holding of treasury-bills, provided comfort and led to the Centre to not borrow any additional amount. 

Informist exclusively last week had reported that the government has the option to use extra cash with the National Small Savings Fund to reduce market borrowing in the current financial year.

Quanteco economists expect yield on the 10-year benchmark 6.10%, 2031 paper to be moderate compared to shorter-maturity gilts due to more supply of the paper in Oct-Mar. According to the borrowing calendar, the Centre will be raising 130 bln rupees weekly compared to 110 bln rupees it raised during Apr-Sep. 

YES Bank in a research note said that they see the yield on the 10-year paper to be in the range of 6.15-6.35% with a fulcrum around 6.25% for the rest of 2021-22 (Apr-Mar).

Today, the 10-year benchmark 6.10%, 2031 paper may gain as dealers may stock up the gilt in a bid to sell it to the RBI at a higher price at its bond-purchase auction on Thursday. The 6.64%, 2035 gilt, may also gain as the central bank included the paper as well at its 150-bln-rupee bond-purchase auction under the government securities acquisition programme.

Gains, however, across the board might be limited as dealers would avoid aggressive bets ahead of the RBI's monetary policy meeting scheduled early October, which is expected to shed some light whether the central bank would be taking any steps to reduce the excess liquidity in the banking system.

According to the announcement of the central bank on Monday, after market hours, also doubled the quantum of the seven-day variable rate reverse repo operation that it has been conducting for the past three weeks to tune of 2 trln rupees. 

Gains may also be limited with crude oil prices trading near three-year highs. The Brent crude oil futures contract for November delivery rose more than $1 to hit its highest level since October 2018, before settling at $79.53/bbl on Monday. Today, the contract hit a high of $79.92/bbl, very close to the psychologically-crucial mark of $80 a barrel.

Typically, a rise in crude oil prices increases upside risks to inflation in India and eats into the room for the RBI to prolong its monetary policy accommodation.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.18-6.25% during the day.  (Nikhil Patwardhan)

End

US$1 = 74.04 rupees

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

Edited by Aditya Sakorkar

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