Informist, Thursday, Sep 23, 2021

By Aaryan Khanna

NEW DELHI – Most government bonds ended off highs today after the result of the Reserve Bank of India's bond purchase auction showed that the central bank bought smaller-than-expected amounts of liquid papers, that too at disappointing cut-off prices. Prices fell as traders who had stocked up on these bonds hoping that the central bank would shell out high prices decided to offload them in the secondary market instead, dealers said. 

The Reserve Bank of India had offered to buy 150 bln rupees worth of three papers -– the 7.17%, 2028 bond, 6.10%, 2031 bond, and 6.64%, 2035 bond under its government securities acquisition programme today. Of these, the 2031 and 2035 bonds are currently the two most traded papers by volume.

The central bank bought the 10-year benchmark 6.10%, 2031 bond at a maximum price of 99.75 rupees, which was lower than the 99.80-rupee median estimate of an Informist poll. While traders had anticipated the central bank would pick up 35-50 bln rupees of the gilt at the auction, the RBI only bought 23.32 bln rupees of the benchmark bond.

Despite the disappointment, some traders avoided trimming their holdings ahead of the central bank's announcement of its next round of bond purchase. The RBI is still to buy around 150 bln rupees of gilts out of the 1.2 trln rupees worth of purchases it committed for Jul-Sep under its bond-buying scheme.

Meanwhile, the other liquid gilt at the auction – the 6.64%, 2035 bond – was tendered heavily by banks at the RBI after a sharp run-up in the gilt's price over the past few weeks, with traders offloading the gilt at a profit to the central bank, dealers said.

"The result didn't cause a panic, banks were just undercutting each other which drove the cutoffs down, so the 6.64%, 2035 bond was supported in the secondary (market), and it ended higher than the cutoff, as expected," a dealer at a private bank said.

The 10-year benchmark 6.10%, 2031 bond ended at 99.70 rupees or 6.14% yield, against 99.71 rupees or 6.14% yield on Wednesday.

Investors also avoided large bets ahead of the 310-bln-rupee weekly gilt auction on Friday, which will feature the on-the-run 6.67%, 2035 bond and the 5.63%, 2026 bond, dealers said.

The 5.63%, 2026 bond managed to buck the trend, as investors value bought the 5-year benchmark gilt after its yield rose above the psychologically-crucial 5.60% mark earlier in the day, dealers said.

"I think FPI buying could continue in short-end, plus investors did pick up the 5.63% at 5.60% (yield) since auction is expected to sail through again tomorrow," a dealer at a primary dealership said.

Traders also stepped up purchases speculating further flows from overseas investors, dealers said.

According to the website of the Clearing Corp of India Ltd, 4 bln rupees worth of deal was struck in the 5.63%, 2026 bond on a T+2 settlement basis under the unconfirmed standard lot reported deals on the Negotiated Dealing System-Order Matching Segment.

According to data on RBI's Negotiated Dealing System - Order Matching Platform, the market-wide turnover today was 371.25 bln rupees, as against 380.15 bln rupees on Wednesday.

OUTLOOK

Government bonds may open steady on Friday as traders may remain cautious ahead of the 310-bln-rupee weekly gilt auction.

The government is scheduled to raise 110 bln rupees through the 5.63%, 2026 bond; 30 bln rupees through the floating rate bond, 2034; 100 bln rupees through the 6.64%, 2035 bond; and 70 bln rupees through the 6.67%, 2050 bond.  

The 10-year benchmark 6.10%, 2031 bond and the 6.64%, 2035 bond may rise due to the inclusion of these papers in the next round of RBI's bond purchase under the government security acquisition programme on Sep 30.

Meanwhile, uncertainty over additional borrowing for goods and services tax cess shortfall to states, in the run-up to the release of the Centre's borrowing calendar for the second half of 2021-22 (Apr-Mar), may keep dealers on the sidelines.

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

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.12-6.17% on Friday.

India Gilts: Steady before RBI's OMO auctions; FOMC in line with view

MUMBAI--1125 IST--Government bonds were steady because dealers avoided large bets before the Reserve Bank of India's twin auctions for a bond purchase and a sale worth 150 bln rupees each, dealers said. Moreover, the outcome of the US Federal Reserve's bi-monthly monetary policy meeting and US Federal Reserve Chair Jerome Powell's comments at the media briefing, which were keenly watched by investors, were largely on expected lines, which led to dealers avoiding aggressive bets.

The central bank has offered to buy 150 bln rupees worth of three gilts, including the two-most traded papers of late--the 6.10%, 2031 paper and the 6.64%, 2035 paper--at the auction today. The RBI will also sell shorter-maturity papers worth of the same quantum today.

The cut-offs set by the central bank and the quantum that it takes at the auction today, especially of the 6.10%, 2031 and the 6.64%, 2035 gilts, would give hints to the market on the RBI's desired level of yields on the papers across maturities, dealers said.

"The five-year paper had gained sharply and currently is at levels where the central bank would be okay with," said a dealer with a private bank.

"I guess the steepness is on the longer end of the curve is something that the RBI would be mindful of, and so I believe that the cutoff set especially on the 6.64%, 2035 paper would signal as to where the RBI wants yield on the new 14-year paper to be at."

If the RBI ends up buying more than 70 bln rupees worth of either of the papers, and at a sharply higher price than that prevailing in the secondary market, investors would see it has a signal that the central bank wants to cap yields.

Most dealers expect the central bank to buy at least take 50 bln rupees each of the 6.10%, 2031 and 6.64%, 2035 bonds.

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.11-6.17% today. (Nikhil Patwardhan)

India Gilts: Seen steady as US FOMC meet outcome on expected lines

MUMBAI – Government bonds are seen steady today because dealers may avoid placing aggressive bets after the outcome of the US Federal Open Market Committee's bi-monthly monetary policy meeting, which was closely monitored by global investors, was largely on expected lines.

The US Federal Reserve kept the federal funds rate target range unchanged at 0.00-0.25%, but warned that it may soon need to reduce its assets purchases every month.

At the media briefing post the detailing of the monetary policy, US Federal Reserve Chair Jerome Powell hinted that tapering of asset purchases might well begin as soon as in November. Meanwhile, more members of the US FOMC now expect the central bank to hike interest rates by 2022, bringing forward the timeline from 2023 as was projected earlier.

While the outcome was an upgrade from July, when the committee had said it would continue to assess progress made towards the employment and inflation goals in the coming meetings, US treasury yields did not react sharply as much of it was already digested by investors across the world. The yield on the 10-year US Treasury note ended at 1.32% on Wednesday, against the previous close of 1.33%.

"Largely what Powell said yesterday (Wednesday) was already priced in and was expected especially after his address at the Jackson Hole summit last month," said a dealer with a primary dealership.

"While interest rate hike next year itself was a bit of a surprise, the US yields didn't move much, so I guess that would not have much of an impact on domestic gilts at least."

All eyes would now be on the Reserve Bank of India's simultaneous gilt purchase and sale auctions, scheduled at 1000 IST today. The central bank will sell shorter-tenure gilts worth 150 bln rupees and buy longer-maturity papers of the same quantum under the government securities acquisition programme.

The RBI has included the two most traded gilts, the 6.10%, 2031 gilt and the 6.64%, 2035 gilt, at the purchase auction. The two gilts had risen sharply over the last two weeks as dealers were expecting the central bank to include the two papers under the gilt-purchase plan and were therefore stocking up the gilts in a bid to sell it to the RBI at a high price at the auction.

Under the bond-buy plan, the RBI has offered to buy gilts worth 1.2 trln rupees in Jul-Sep, and the central bank has already bought gilts worth 900 bln rupees till now.

However, today, some dealers might take an opportunity to book profits in the two gilts--the 6.10%, 2031 and the 6.64%, 2035--as most of the market was expecting the central bank to announce a gilt purchase auction of the balance 300 bln rupees together, while the RBI announced an auction of only 150 bln rupees.

Informist exclusively reported earlier this week, quoting a banking source, that the RBI might replace the government securities acquisition programme with open market purchases and operation twists--buying and selling of gilts simultaneously--from October to hint at any yield management, which had spread jitters among investors.

However, dealers will exercise caution due to uncertainty over additional borrowing for goods and services tax cess shortfall to states, in the run-up to the release of the Centre's borrowing calendar for the second half of 2021-22 (Apr-Mar).

Meanwhile, crude oil prices rose overnight, which also might weigh on domestic bonds, dealers said. Brent crude oil futures contract for November delivery topped the psychologically crucial mark of $76 a barrel on Wednesday. The contract settled at $76.19/bbl and today, it was slightly higher at $76.40 a barrel. Typically, a rise in crude oil prices poses upside risk to India's headline inflation and weakens the case for the RBI to continue its ultra-accommodative monetary policy for long. 

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.11-6.17% today. (Nikhil Patwardhan)

End

US$1 = 73.64 rupees

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

Edited by Maheswaran Parameswaran

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