Informist, Monday, Jul 4, 2022

By Aaryan Khanna

NEW DELHI – Government bond prices ended sharply higher tracking an overnight slump in US Treasury yields as fears of an aggressive series of rate hikes by the US Federal Reserve eased.

The 10-year benchmark 6.54%, 2032 bond settled at 94.36 rupees or 7.37% yield, as against 94.03 rupees, or 7.42% yield on Friday.

Yield on the 10-year benchmark US Treasury note settled 10 basis points lower on Friday at 2.88% as investors priced in the likelihood that the Fed will be able to force inflation down to near its target rate.

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 to foreign investors.

Traders covered short bets early in the day as the 10-year benchmark 6.54%, 2032 bond fell under the key 7.38% mark. In previous sessions, investors had booked profits at those levels and avoided doing so today due to the strong upward momentum in prices, dealers said.

Trade volumes were robust with the market split on the direction of yield movements going forward, particularly due to the volatility in US Treasury yields and fears of recession in the world's largest economy contrasting with impending rate hikes by global central banks.

However, market sentiment remained upbeat, particularly after the government's introduction of a special excise tax on exported crude oil products, which may make up for some revenue losses and prevent additional borrowing in the latter half of the fiscal year ending March, dealers said.

Going by India's crude oil output in 2021-22, the new levy in the form of special additional excise duty effective from Jul 1 would fetch the government roughly 680 bln rupees on an annualised basis.

"There is a cycle of buying from the continuous fall in US yields, followed by profit booking which today moved from the 7.38% level to the 7.35% level (on the 10-year benchmark yield)," a dealer at a private sector bank said.

Gains in the 14-year benchmark 7.54%, 2036 bond were limited, despite the bond having a higher-than-expected cut-off price at the weekly gilt auction on Friday.

Investors avoided adding the 2036 bond to their portfolios due to its narrowing spread over the 10-year benchmark yield. Today, the spread between the two bonds stood at 21 bps, down from over 40 bps earlier this year.

Moreover, demand for the 14-year gilt is expected to wane as investors stock up on state bonds at subsequent auctions, which typically provide significantly higher returns than gilts of comparable maturities.

In Apr-Jun, states borrowed only 1.10 trln rupees against the indicative calendar of 1.90 trln rupees issued by the RBI.

"Insurers had stepped into the gilts market to buy the 14-year bond in Apr-Jun, but that is likely to dry up in the current quarter as state bonds with 11-20 year maturities are offered every week," 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 320.50 bln rupees, compared with 245.35 bln rupees on Friday.

The overnight fall in US Treasury yields also pulled down overnight indexed swap rates, especially in the five-year segment, dealers said.

Traders booked profits and unwound some received fixed rate bets after the recent slump in the five-year swap rate, which limited the fall, dealers said.

The one-year OIS rate ended at 6.30% as against 6.32%, while the five-year swap rate fell to 6.77% from its previous close of 6.80%.

OUTLOOK

Government bond prices are likely to open steady on Tuesday on caution ahead of the US Federal Open Market Committee minutes for its June meeting.

Any movement in crude oil prices and US bond yields over the weekend may also lend early cues to domestic bonds.

During the day, bonds may trade within a narrow range in the likely absence of fresh domestic cues. Traders may be wary of making large purchases if the 10-year benchmark bond yield slips below the 6.35% mark. 

Traders may trim their holdings to make room for the fresh supply at the weekly gilt auction on Friday, dealers said.

Yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.33-7.42%.

India Gilts: Remain sharply up as Brent crude price also eases

NEW DELHI--1425 IST--Government bonds remained sharply higher tracking global cues, with prices within a narrow range after an initial surge due to a lack of significant domestic cues.

The 10-year US Treasury yield slumped 10 basis points on Friday, stoking demand for domestic gilts due to a rise in the interest rate differential between the haven asset and emerging market debt, dealers said.

Brent crude for September delivery also eased below the $110-a-bbl mark, supporting market sentiment that was weighing India's inflation data and pace of rate hikes in the near term, dealers said.

"The trigger today has been US Treasury yields and early reports that Iran would be looking at discounts on oil exports," a dealer at a foreign bank said.

"I am quite sceptical of demand from national banks, nobody wants to build a significant portfolio near 7.35% (yield on the 10-year bond)," the dealer said.

Gilts had given up some gains earlier as traders initiated fresh short bets after the yield on the 10-year benchmark 6.54%, 2032 bond fell to 7.35%, dealers said.

During the day, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.34-7.40%.  (Aaryan Khanna)

India Gilts: Surge on slump in US ylds as Fed rate hike fears ease

NEW DELHI--1000 IST--Government bond prices surged tracking a slump in US Treasury yield on Friday as fears of sustained rate hikes by the US Federal Reserve eased, dealers said.

Yield on the 10-year benchmark US Treasury note settled 10 basis points lower on Friday at 2.88% as investors priced in the likelihood that the Fed will be able to force inflation down to near its target rate.

Traders had booked profits on Friday under the 7.40% yield on the 10-year benchmark 6.54%, 2032 bond as they were uncertain of prices sustaining under those levels.

"The 7.38% figure (on the 10-year benchmark yield) was effectively framing the bottom of the bottom of the trading range, which is why people have cut short positions and new level, that we haven't seen for a month, are being tested," a dealer at a private bank said.

Some traders also stepped up purchases after missing out on on-the-run gilts offered at the weekly gilt auction on Friday, dealers said.

Although the Reserve Bank of India devolved 9.72 bln rupees worth of floating rate bond 2028 bond on primary dealers on Friday, cutoff prices for all papers were set higher than those estimated by an Informist poll.

During the day, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.34-7.40%.  (Aaryan Khanna)

India Gilts: Seen steady as rise in crude may offset slump in US yld

NEW DELHI - Prices of government bond prices may open steady today as a rise in crude oil prices may offset the impact of a slump in US Treasury yields, dealers said. Moreover, traders may avoid aggressive bets due to lack of significant domestic cues.

The yield on the 10-year benchmark US Treasury note settled 10 basis points lower on Friday at 2.88% as investors priced in the likelihood that the US Federal Reserve will force inflation down to near its target rate.

On the other hand, crude prices ended over 2% higher on Friday due to further disruptions in supply from Libya, Norway and Ecuador. Brent crude contract for September delivery rose to $111.64 a bbl on Friday.

Traders may avoid stocking up on gilts after the Reserve Bank of India devolved 9.72 bln rupees of the floating rate bond 2028 on primary dealers at the weekly gilt auction on Friday, dealers said.

Consequently, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.38-7.46%, as against 7.42% on Friday.  (Aaryan Khanna)

End

US$1 = 78.95 rupees

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

Edited by Michael Correya

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