Informist, Friday, Oct 1, 2021

By Aaryan Khanna

NEW DELHI – Government bond yields continued trending upward as more traders took bets on the Reserve Bank of India hiking its reverse repo rate earlier-than-expected, at its October policy meeting next week, dealers said.

The 10-year benchmark 6.10%, 2031 bond ended at 98.95 rupees or 6.24% yield, as against 99.10 rupees or 6.22% yield on Thursday.

Expectations mounted that the central bank would raise the reverse repo rate by 15 basis points at the outcome of its next policy review on Oct 8, after Citi on Thursday reportedly brought forward its forecast of a hike to October from December, dealers said. 

Some other banks also turned their internal forecasts to a more immediate hike in the reverse repo rate, dealers said.

An initial hike in the reverse repo rate is seen as the beginning of policy normalisation, setting the course for a 40-basis-point upward movement in the RBI's Liquidity Adjustment Facility corridor. While the repo rate of 4% is considered the benchmark policy rate, overnight money market rates had been tethered to the reverse repo rate of 3.35% due to the large amount of surplus liquidity in the financial system.

These rates had shot up after the RBI on Tuesday set the cut-off for its seven-day variable rate reverse repo auction worth 2 trln rupees at the highest possible rate of 3.99%, which led traders to believe the central bank might be hinting at nudging short-term rates higher, dealers said.

"It's been a constant yes and no today (on the reverse repo hike), people are concerned about being in oversold positions but in a situation where demand is weak and uncertainty is high, plus money market rates are all up, short-term yields had to go up," said a dealer at a state-owned bank.

While some traders were wary of placing short bets on gilts after RBI officials in their public remarks reiterated that the central bank would continue with policy accommodation, others said the more recent signal of the variable rate reverse repo cutoff outweighed the comments, dealers said.

Moreover, the market was widely expecting the RBI to increase the tenure of its variable rate reverse repo operations after its October policy meeting, soaking up liquidity on a more durable basis, which would not augur well for short-term gilts even if the central bank refrained from a reverse repo rate hike, dealers said.

The rise in long-term gilt yields was capped as these bonds had limited exposure to the RBI's potential normalisation measures on both liquidity management and reverse repo fronts, dealers said. However, the 6.10%, 2031 bond's yield climbed as traders made room to absorb the fresh supply of the paper at the weekly gilt auction today.

"At this point, mutual fund buying has also stopped, so whatever investment demand is coming to the auction has come directly through the public-sector banks instead of diverse participants, like what happened during the rally a few weeks ago," said a dealer at a primary dealership.

The 2031 bond recovered some losses towards the end of the day, as the auction cut-off was on expected lines. Investors also stepped up purchases as the benchmark yield rose above the 6.25%-mark today, anticipating that the RBI would not allow it to rise further and on caution ahead of the policy.

According to data on the RBI's Negotiated Dealing System - Order Matching Platform, the market-wide turnover was 279.60 bln rupees, as against 350.35 bln rupees on Thursday.

OUTLOOK

Gilts are not traded on Saturday.

On Monday, government bonds are seen opening steady in the run-up to the RBI's next policy review from Oct 6-8.

Traders may avoid aggressive bets on short-term gilts after the cutoff at the RBI's seven-day, 2-trln-rupee variable rate reverse repo operation on Tuesday was higher than expected, raising concerns that the central bank's liquidity management measures would push up short-term rates.

Bond prices may have a tailwind from the lack of additional borrowing by the Centre in Oct-Mar, but any sharp movement in US Treasury yields and crude oil prices over the weekend may guide domestic bonds early in trade.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.21-6.27% on Monday.

India Gilts: Fall as mkt takes bets on 15 bps reverse repo hike Oct

NEW DELHI--1410 IST--Government bonds fell because traders trimmed holdings to price in the likelihood of a hike in reverse repo rate as early as next week.

Traders took short bets on the 5.63%, 2026 bond as they expect the RBI to raise the reverse repo rate by 15 basis points at the outcome of its policy meeting on Oct 8. Further, bonds across maturities fell, factoring in the hike, as the spread with the 5-year benchmark narrowed and money market rates spiked.

The RBI had on Tuesday set the cut-off for its seven-day variable rate reverse repo auction worth 2 trln rupees at the highest possible rate of 3.99%, which led traders to believe the central bank might be hinting at nudging short-term rates higher, dealers said.

Moreover, at the 170-bln-rupee Treasury bill auction on Wednesday, cut-offs rose 11-21 basis points from the previous week.

"People are cutting sharply because the reverse repo hike of 15 basis points is expected, now it's a broad based sentiment that is being passed down by treasury heads as well," said a dealer at a state-owned bank.

Meanwhile, weak demand at the 240-bln-rupee weekly gilt auction earlier today also weighed on prices. Investors avoided aggressive bids after the RBI bought a less-than-expected quantum of the 10-year benchmark 6.10%, 2031 gilt at the government securities acquisition programme auction on Thursday, dealers said.

Large public-sector banks, which were able to offload the stock of the off-the-run 7.26%, 2029 bond to the RBI on Thursday, were the primary bidders at the auction today, with other investor segments such as mutual fund houses seen avoiding bids, dealers said.

Traders were divided on what the auction result would mean for the benchmark yield. While some traders expected a sell-off in the 6.10%, 2031 bond should the RBI set a low cut-off price, driving up the yield, others expected the yield to be capped at the 6.25%-mark today. 

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.20-6.26% during the day.  (Aaryan Khanna)

India Gilts: Most bonds steady; 2031 gilt tad down before auction

NEW DELHI--1025 IST--Most government bonds were steady because traders avoided large bets ahead of the result of the weekly gilt auction worth 240 bln rupees, which includes the 10-year benchmark bond, dealers said.

The auction is expected to sail through, as the auction stock had reduced from previous weeks, and investors were seen stepping up their gilt purchases at the first auction in October after lightening their portfolios at the end of the Jul-Sep quarter, dealers said.

However, the 6.10%, 2031 bond traded on a slightly weaker note as traders made room to absorb fresh supply of the paper. The government had offered to sell 130 bln rupees of the paper at the auction today.

Further, the RBI's recent gilt purchases under the government securities acquisition programme, which included the 10-year benchmark gilt, did not boost investor appetite as they could not move as much of the gilt as expected off their books. Further, the cut-off price at which the central bank bought the 6.10%, 2031 gilt indicated that it was comfortable with the benchmark yield at this level in the near term, dealers said.

"There's no threat to the auction but there's no mood for any sort of aggressive bids either, I think it could come around market levels or slightly below considering the (bond buy) result yesterday," a dealer at a private bank said.

Meanwhile, fears of a surprise reverse repo rate hike as soon as the RBI's October policy faded with the five-year benchmark 5.63%, 2026 bond steady. While traders avoided aggressive bets on short-term gilts, there would likely be no sell-off until there is further clarity from the RBI on normalisation measures, dealers said.

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.20-6.25% during the day.  (Aaryan Khanna)

India Gilts: Seen steady ahead of 240-bln-rupee weekly gilt sale

MUMBAI – Government bonds are seen steady because dealers may avoid aggressive bets ahead of a 240-bln-rupee weekly gilt auction, dealers said.

The government will borrow 40 bln rupees through the auction of the new 2028 floating rate bond, 130 bln rupees through the 6.10%, 2031 bond, and 70 bln rupees through the 6.76%, 2061 bond.

While the overall demand at the auction is expected to be firm, dealers were a bit sceptical about the RBI setting a lower cut-off for the 10-year benchmark 6.10%, 2031 paper than the cut-off it had set at the previous auction. The RBI did not take a large quantum of the paper at the previous two scheduled gilt purchase auctions under the government securities acquisition programme, dealers said, adding that it did not buy the paper at an aggressive price as well.

The RBI bought 20.45 bln rupees in the gilt auction against market expectations of around 50 bln rupees. The central bank also set the cut-off for the paper at 99.30 rupees, against 99.38 rupees that the market was expecting.

Dealers, thus, were of the belief that the central bank would set the cut-off for the paper at least 5-10 paise lower than the secondary market price of the paper.

The underwriting fee estimates, too, were higher compared to the previous underwriting fee commission set by the RBI for the paper. A poll of nine bond dealers by Informist had pegged the underwriting fee on the 10-year paper at 2.25 paise, sharply higher than the previous cut-off of 0.54 paisa.

Moreover, traders were cautious ahead of the RBI's monetary policy review meeting next week. The market is divided between whether the RBI would take more aggressive steps to begin normalisation from this policy itself. While most were anticipating the central bank to not hike either of the policy rates until February next year, the view has changed slightly with the US Federal Open Market Committee earlier this month hinting at a quicker-than-expected unwinding of its ultra-accommodative monetary policy measures.

Moreover, the RBI set the cut-off for its seven-day variable rate reverse repo auction worth 2 trln rupees at the highest possible rate of 3.99% on Tuesday, which led traders to believe the central bank might be hinting at nudging short-term rates higher.

Some sections of the market now fear that the RBI may hike the reverse repo rate at this policy review itself. The fears were aggravated after multiple news reports said on Thursday that Citi expects the RBI to hike the reverse repo rate by 15 bps in October.

Meanwhile, on the global front, US Treasury yields dipped for the first time in six days, which may provide some relief to domestic papers, dealers said. The yield on the 10-year US Treasury note ended 3 basis points lower to settle at 1.52% on Thursday.

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.

Crude oil prices, too, ended lower for the third straight session on Thursday, which may lend support to domestic bonds. The Brent crude oil futures contract for November delivery ended at $78.52/bbl, against the previous close of $78.64 a barrel. The prices, however, have risen nearly 5% for the quarter ended September. Crude oil prices have been confined to a narrow range after having surged to three-year highs earlier this week.

Typically, a fall in crude oil prices reduces upside risks to inflation in India and gives the RBI more room to prolong its monetary policy accommodation.

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.20-6.25% during the day.  (Nikhil Patwardhan)

End

US$1 = 74.12 rupees

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

Edited by Mainak Moitra

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