Monday, Nov 2, 2020

By Suyash Pande

NEW DELHI – Government bond prices ended slightly lower today because of a sharp rise in US Treasury yields recently and due to uncertainty before the US presidential elections on Tuesday, dealers said.

The 10-year benchmark 5.77%, 2030 bond ended at 99.10 rupees or 5.89% yield, compared with 99.16 rupees or 5.88% yield on Thursday. Domestic money markets were closed on Friday on account of Id-e-Milad.  

Opinion polls predict Democrat presidential candidate Joe Biden winning the election. If his party also wins majority in the Senate and the Congress, a large US fiscal stimulus is expected to be passed, which may push US Treasury yields upwards, dealers said.

The yield on the 10-year benchmark US Treasury note rose by 9 basis points over Thursday and Friday in anticipation of a victory for Biden.

Typically, a rise in US Treasury notes prompts foreign portfolio investors to unwind their purchases of fixed income assets in riskier emerging markets such as India. On Friday, the yield on the US benchmark note settled at 0.88%.

This year, there is the additional uncertainty about when the result of the presidential election be known, with many US voters choosing to mail their ballot papers. Incumbent president Donald Trump has said he may not concede defeat, claiming that mail ballots are vulnerable to fraud.

These circumstances have weakened risk appetite due to the possibility of political unrest in the US and prompted market participants to sell assets and stay on the sidelines.

Bond prices were also weighed down by the disappointing auction result on Thursday, dealers said. The coupons set by the Reserve Bank of India for the bonds maturing in 2035 and 2050 were higher than expected.

Market participants said the auction result was a sign that demand for dated securities remained weak despite the actions taken by the central bank so far.

"The auction result was disappointing. It is because of the RBI actions that prices have not fallen otherwise the yields should be much higher than where they are," dealer with a private bank said. "At these levels many banks don't want to add to their HTM (held-to-maturity) books and would rather trade illiquid papers and play on spreads and carry trade."

Traders expect bond yields to remain range-bound as state-owned banks are said to have sold bonds heavily last month with banks looking to sell the 10-year bond near psychologically crucial 5.80% mark on the view that yield would not sustain below that level.

On the other hand, frequent open market operation purchases by the RBI are expected to cap any rise in bond yields going ahead. The central bank purchased 500 bln rupees of dated securities and state bonds through OMOs in October and bought another 111.55 bln rupees worth of bonds in the secondary market between Oct 2 and Oct 23.

The market-wide turnover was 199.5 bln rupees against 358.95 bln rupees on Thursday, according to data on the RBI's Negotiated Dealing System - Order Matching platform.

OVERNIGHT INDEXED SWAP
Overnight indexed swap rates ended higher amid thin trade volumes as traders unwound their received positions due to a sharp rise in US Treasury yields over the extended weekend in the Indian money market, dealers said.

The one-year swap rate ended flat at 3.60-3.64% against the previous close on Thursday. The five-year OIS rate settled at 4.32-4.36% against the previous close of 4.30-4.34%. 

Traders said the ongoing stalemate over a fresh round of stimulus package and the uncertainties surrounding the US presidential elections had led to a rise in

US Treasury yields.

OUTLOOK
Government bond prices are likely to open steady on Tuesday before the conclusion of the US presidential election later in the day.

Opinion poll have predicted a victory for Joe Biden which traders say increases the chances of a large fiscal stimulus in the US which may push US Treasury yields up.

Any sharp movement in crude oil prices may also lend cues at open.

The yield on the 10-year benchmark 5.77%, 2030 bond is seen in a band of 5.88-5.93% as against 5.89% today.

India Gilts: Slightly down on risk aversion ahead of US election Tue

NEW DELHI--1250 IST--Government bond prices edged lower because market participants expect US Treasury yields to rise after the US presidential election on Tuesday, dealers said. 

Opinion polls predict Democrat presidential candidate Joe Biden will win. If his party wins the majority in the US Congress and the Senate as well, then it may lead to large US fiscal stimulus, which may put upward pressure on US yields, dealers said. 

"There is a lot of uncertainty about the US election and what will happen-will we even know the result?" a dealer with a primary dealership said. 

"If Biden wins then US yields are expected to rise because of the stimulus but no one knows what is going to happen if the election is a close contest. People are preferring to sell at the moment or stay on the sidelines because of the high-risk event," the dealer said.

US President Donald Trump has previously said he may not accept the result because he believes there is room for defrauding the voting system due to mail-in ballots this year. Market participants are uncertain about what will happen if there is a contested election between the two parties.

Appetite for bonds was also weighed because of the disappointment over auction result on Thursday.

The coupon set by the Reserve Bank of India for the 2035 gilt was 3 basis points higher than market expectations. Traders said the auction result was a signal that despite the quantum of open market operations done by the central bank already, demand remains fragile.

Yield on the 10-year benchmark 5.77%, 2030 bond is seen in a band of 5.85-5.90% for rest of the day.  (Suyash Pande)

India Gilts: Steady; mkt cautious before US presidential polls Tue

NEW DELHI--1035 IST--Government bond prices were steady as market participants treaded with caution ahead of the US presidential elections on Tuesday, dealers said.

According to nationwide opinion polls, Democratic Party's presidential candidate Joe Biden has an edge over incumbent US President Donald Trump, but the result remains uncertain as swing states may have the final say in the outcome similar to 2016 elections.

Market sentiment was also weighed down by the fresh lockdowns imposed in Europe with coronavirus cases continuing to rise, and could derail the global economic recovery, dealers said.

After the nationwide lockdowns in France and Germany, the UK on Saturday announced fresh lockdown to curb the recent surge in coronavirus cases.

"There are too many uncertainties the market is faced with from the global front, firstly the outcome of US elections and then the lockdowns, which has resulted in a sell-off across various asset classes. Although they won't have a direct impact on our market, there is bound to be a knock-on effect," said a senior dealer with a private bank.

Participants are of the view that such uncertainties could lead to foreign portfolio investors unwinding their investments in riskier emerging market assets such as the Indian sovereign debt, dealers said.

"...if you look at all the liquid bonds in the market, they are soon going to turn illiquid, which is why people would like to sell those papers to clear some stock and make room for the fresh ones that are going to be issued in a week or so," the dealer added.

Moreover, participants believe that with most of the liquid bonds including the 10-year benchmark 5.77%, 2030 nearing the government's informal cap of 1.2 trln rupees to be borrowed from a single security, these papers may remain under pressure during the day, dealers said.

The current outstanding on the 10-year benchmark bond stands at 1.14 trln rupees.

During the day, yield on the 10-year benchmark 5.77%, 2030 bond is seen in a band of 5.86-5.90%, dealers said. (Vaibhav Chakraborty)

India Gilts: Seen down on rise in US yields, weakness in rupee

NEW DELHI – Government bond prices are expected to open on a weak note today as market participants are likely to be jittery that the sharp rise in the US Treasury yields over the extended weekend could lead foreign portfolio investors to unwind their investments from the Indian debt market.

Indian money markets were closed Friday on account of Id-E-Milad.

Yield on the 10-year benchmark US Treasury note rose by 9 basis points over Thursday and Friday. Typically, a rise in US Treasury notes prompts foreign portfolio investors to unwind their purchases of fixed income assets in riskier emerging markets such as India. On Friday, yield on the US benchmark note settled at 0.88%. The yield was last at 0.86%.

Moreover, participants believe the fall of the rupee on Thursday, which is likely to continue today as well, could also prompt overseas investors to sell Indian government bonds.

On Thursday, the rupee settled at 74.1000 a dollar, compared with 73.8750 at 1400 IST on Wednesday.

Participants are of the view that with US presidential elections scheduled on Tuesday and the fresh lockdowns in several European nations to curb the spread of coronavirus could result in weakness in the Indian currency.

After France and Germany, UK Prime Minister Boris Johnson on Saturday imposed a second nationwide lockdown as the country witnessed a surge in coronavirus cases.

Some market participants believe that the higher-than-expected coupon set by the Reserve Bank of India on the new 2035 bond at the weekly debt auction on Thursday could also weigh on bond prices.

The RBI set a coupon of 6.22% on the new 2035 bond, 3 basis points higher than market's expectations according to a poll of 10 bond dealers by Cogencis.

Trade volume is expected to remain low during the day as some market participants may refrain from placing large bets ahead of the US Presidential election outcome.

However, the fall in bond prices is seen limited as the RBI is set to conduct open market purchases of state bonds on Thursday.

Yield on the 10-year benchmark 5.77%, 2030 bond is seen in a band of 5.85-5.91% as against 5.88% on Thursday. (Vaibhav Chakraborty)

End

US$1 = 74.43 rupees 

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

Edited by Avishek Dutta

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