Informist, Wednesday, Oct 13, 2021

By Aaryan Khanna

NEW DELHI – Government bonds ended higher today because CPI inflation fell to a five-month low of 4.35% in September, which eased fears of a sooner-than-expected pass-through of elevated crude oil prices to domestic inflation. The September CPI print was lower than the 4.5% estimated by an Informist poll. 

The 10-year benchmark 6.10%, 2031 bond ended at 98.45 rupees or 6.31% yield, against 98.36 rupees or 6.33% yield on Tuesday.

Traders had slashed holdings of long-term gilts over the past week due to the elevated price of crude oil, which crossed $80 per barrel.

In the run-up to the release of CPI data, some traders had taken short bets on gilts on the view that elevated crude oil prices, which had risen towards the end of the previous month, would reflect in the September inflation print as well, dealers said. 

However, traders covered short bets in long-term gilts, particularly the 14-year benchmark 6.67%, 2035 gilt, on the benign September CPI number as the pass-through had been delayed and would likely reflect in October's print next month, dealers said.

"This was the expected market reaction to a good CPI number broadly in line (with expectations), the 1-2 basis point movement in the long-term gilts was expected since it was inflation fears which had been pushing up the yield," a dealer at a state-owned bank said.

Moreover, traders preferred to hold papers maturing in 2035 instead of the 10-year benchmark 6.10%, 2031 bond ahead of the weekly gilt auction. The Reserve Bank of India will auction 130 bln rupees of the 10-year benchmark gilt on Thursday as part of the 240-bln-rupee weekly gilt sale.

The 6.10%, 2031 bond lagged its peers as the market was uncertain about the demand at its auction, with traders trimming holdings of the paper expecting to pick up the fresh supply at higher yields, dealers said.

"Of course, considering the supply-demand situation and lack of assurance of RBI gilt buys, not sure if demand will sustain at the auction tomorrow," the dealer quoted above said.

The benign consumer inflation reading also led traders to step up purchases of short-term gilts as they expected a gradual pace of policy normalisation. The print reinforced comments made by RBI officials last week, which likely indicated that the central bank was in no hurry to withdraw policy accommodation, dealers said.

Further, the RBI refrained from announcing a hike in the reverse repo rate and did not extend the duration of its variable rate reverse repo operations last week, pulling down the yields of short-term gilts more compared to those of longer maturities, dealers said.

"Since the Jul-Sep forecast came through, I think the market sees that the inflation target could be maintained and the current crude issue is temporary, so the next two months automatically become a happy time for the 5-year (benchmark 5.63%, 2026 bond) as the yields have already priced in higher money market rates," a dealer at a foreign bank said.

Moreover, traders also bought gilts as selling pressures from overseas cues eased over the last two days, dealers said. After jumping 4% last week, the Brent crude oil futures contract for December delivery remained in a narrow band, around the $83 per bbl, instead of rising, which enabled traders to avoid trimming their holdings further, dealers said.

Meanwhile, the yield on the 10-year benchmark US Treasury note, which climbed 12 basis points last week, also eased 2 bps to 1.59% on Tuesday, and was at 1.57% at the close of Indian trading hours today. 

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.

According to data on the RBI's Negotiated Dealing System – Order Matching Platform, the market-wide turnover was 319.85 bln rupees today, against 237.15 bln rupees on Tuesday.

OUTLOOK

Gilts are seen opening steady on caution ahead of the weekly gilt auction Thursday.

The government has offered to sell 130 bln rupees of the 6.10%, 2031 bond, 40 bln rupees of the floating rate bond 2034, and 70 bln rupees of the 6.76%, 2061 bond on Thursday.

Money markets will remain shut on Friday for Dussehra.

The 6.10%, 2031 gilt may remain under pressure ahead of its auction on Thursday, especially with the central bank refraining from announcing outright gilt purchases in October. The paper was seen as a candidate by many dealers in the central bank's next round of gilt purchases.

Shorter-tenure gilts may outperform those with longer maturities as the RBI refrained from announcing a hike in the reverse repo rate and did not extend the duration of its variable rate reverse repo operations last week.

Dealers will also watch out for US inflation data for September and minutes of the Federal Reserve's policy meeting last month, both of which are to be released later today.

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

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.36% on Thursday.    

India Gilts: Up; inflation fears retreat on benign Sep CPI print

NEW DELHI--1340 IST--Government bonds were up on the view that the Reserve Bank of India had more room to prolong its accommodative policy support after CPI inflation fell to a five-month low of 4.35% in September, below the 4.5% estimated by an Informist poll.

The benign consumer inflation reading led traders to step up purchases expecting a gradual pace of normalisation, reinforcing comments by RBI officials last week that were seen to signal that the central bank was in no hurry to withdraw policy accommodation, dealers said.

The gilts maturing in 2035 gained the most, led by the 6.67%, 2035 bond as some traders covered short bets in the paper after the benign September CPI number, said dealers.

Traders had slashed holdings of long-term gilts over the past week due to the elevated price of crude oil, fuelling fears of a pass-through of prices into domestic inflation even in the September print, dealers said. 

"Now that crude has stabilised and the September CPI number was low, people are buying at these levels because inflation fears are at a low point for the past week and so the long-end is recovering a little," a dealer at a primary dealership said.

Moreover, traders preferred to hold papers maturing in 2035 instead of the 10-year benchmark 6.10%, 2031 bond ahead of the weekly gilt auction. The government has offered to sell 130 bln rupees of the 10-year benchmark gilt on Thursday.

The 6.10%, 2031 bond lagged behind its peers as the market was uncertain about the demand at its auction, with traders trimming holdings of the paper expecting to pick up the fresh supply at higher yields, dealers said.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.36% today. (Aaryan Khanna)

India Gilts: Rise as September inflation print falls to 5-month low

MUMBAI--1030 IST--Government bonds rose today, albeit marginally, after CPI inflation print for September fell to a five-month low of 4.35%. Inflation fell for the fourth straight month in September, and was below the consensus estimate of 4.5% in a poll by Informist.

The inflation print for September did not reflect the recent rise in global commodity prices, led by crude oil, which many dealers had feared. Dealers thus said the print was a sigh of relief.

However, the gains were limited as dealers were wary of placing large bets because crude oil prices and US Treasury yields remain high. The 10-year US Treasury note ended marginally lower on Tuesday but was still at levels seen only in early June. Crude oil prices, too, ended slightly lower on Tuesday but the Brent crude oil December futures contract continues to trade above the psychologically-crucial mark of $80/bbl.

The 6.67%, 2035 gilt, which had fallen the most this week, was the best-performing paper so far in today's session. The yield on the gilt had topped the psychologically-crucial mark of 6.81%, which was an attractive level to initiate buying, dealers said.

The 10-year benchmark 6.10%, 2031 paper, meanwhile, remained under pressure as some dealers trimmed holdings to make room for fresh supply of the paper at the 130-bln-rupee auction of the paper scheduled Thursday.

The cutoff to be set by the RBI at the auction on Thursday is expected to give cues to the market as to where the central bank wants yields on 10-year papers to be, dealers said.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.36% today. (Nikhil Patwardhan)

India Gilts: May rise as Sep inflation slightly below expectations

MUMBAI – Government bonds are seen higher today after the CPI inflation print for September, released after market hours on Tuesday, showed that inflation eased for the fourth straight month in September, thus giving more room to the Reserve Bank of India to prolong its accommodative policy support.

India's CPI inflation fell to 4.35% in September from 5.30% the previous month, thanks to a favourable base effect and lower food inflation, data released today by the National Statistical Office showed.

The inflation print is below the consensus estimate of 4.5% in a poll by Informist, and takes the average for Jul-Sep to 5.1%, matching the RBI's most recent forecast.

The inflation print was keenly watched by investors as many were looking whether the recent rise in global commodity prices led by crude oil, had any impact on the inflation print.

With September's print, inflation for the first half of 2021-22 (Apr-Mar) comes at 5.33% and the RBI has estimated CPI inflation print for the whole of 2021-22 at 5.3%. The market thus expects the inflation to fall further or stay around 5.3% levels in Oct-Mar if RBI's estimates are to come true, dealers said.

The central bank had slashed inflation estimates for 2021-22 (Apr-Mar) by 40 basis points last week at its monetary policy outcome. 

"The RBI reduced its expectations last week when crude oil prices had soared already," said a dealer with a primary dealership.

"There's also festival season coming up and if despite all this the estimates were cut, then I guess the so-called transient (inflation) worries that they (RBI) have been talking about might reduce and inflation could well stay at around 5% levels or slightly higher but within the central bank's comfort zone."

The rise in bonds, however, might be limited as high crude oil prices and US Treasury yields continue to deter investors. While crude oil prices and US Treasury yields ended marginally lower on Tuesday, both are trading near multi-month highs.

Moreover, the 6.10%, 2031 paper may remain under pressure ahead of its 130-bln-rupee auction scheduled Thursday. Yields on the paper have risen more than 5 basis points over the last three days since the RBI announced discontinuation of its government securities acquisition programme.

The cutoff to be set by the RBI at the auction on Thursday is thus seen giving the market cues as to where the central bank wants yields on 10-year papers to be, dealers said.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.30-6.36% today. (Nikhil Patwardhan)

End

US$1 = 75.37 rupees

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

Edited by Aditya Sakorkar

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