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India Gilts Review:Off-highs as auction cutoff for 10-yr disappoints

Friday, May 24

 

By Bhaskar Dutta

 

NEW DELHI – Government bonds closed off-highs because of persistent profit booking after the recent surge in prices and as the cutoff price for the 10-year paper at today's auction disappointed the market, dealers said.

 

Today, the 10-year benchmark 7.26%, 2029 bond closed at 100.22 rupees or 7.23% yield as against 100.13 rupees or 7.24% yield on Thursday. Earlier in the day, the bond had touched a high of 100.40 rupees or 7.20% yield.

 

Bonds began the day on a strong footing because of a steep overnight decline in US Treasury yields and crude oil prices. Yield on the 10-year US Treasury note dropped 8 basis points to settle at 2.31% on Thursday, while crude oil for July delivery on New York mercantile Exchange declined over 5%, closing $3.51 lower at $57.91 per barrel. The crude oil contract for July delivery was at $58.59/bbl at the end of Indian market hours.

 

A decline in US Treasury yields generally leads to flows of overseas investment into relatively high-yielding emerging market assets such as Indian government bonds.  Falling crude oil prices have a softening effect on India's inflation and ease pressure on government finances as the country is a major importer of the fuel.

 

Hopes of a pickup in foreign portfolio investment had also gained strength because of the Bharatiya Janata Party's resounding victory at the Lok Sabha elections, results of which were announced on Thursday.

 

The BJP's emergence as the single-largest party in the lower house has led to expectations of continuity in economic policymaking while reducing the need for populism measures. 

 

Sure enough, foreign portfolio investors turned out to be large buyers of government bonds today, with their net outstanding investment rising by 14.27 bln rupees, Clearing Corporation of India data showed. The purchases by overseas investors today were mostly driven by the rupee's strength against the dollar.

 

A stronger rupee enhances FPIs' returns from Indian debt, increasing the appeal of these investments. The domestic currency today settled at 69.5250 per dollar, 0.7% stronger than previous close. 

 

Given that the market is faced with fundamental challenges such as oversupply of bonds and concerns about the Centre's finances, a key factor that will shape overseas investors' appetite is the rupee's performance versus the dollar, dealers said.

 

"Today's FPI activity is an encouraging sign; we are not expecting humongous flows like we saw in 2014 but there will be flows if the rupee behaves," a dealer with a primary dealership said. 

 

With the elections out of the way, market players also began to bet on the Reserve Bank of India easing monetary policy and announcing measures to supply liquidity in the banking system at its policy statement on Jun 6. Given the mounting risks to economic growth, some market players expect the central bank to announce measures to support liquidity before the policy review, possibly as early as this week.

 

After market hours today, the RBI said that it would purchase government bonds worth 150 bln rupees on Jun 13 in order to infuse durable liquidity in the banking system.

 

AUCTION DISAPPOINTMENT

 

As the day progressed, bonds surrendered most gains because the result of today's 170-bln-rupee gilt auction showed that the RBI had set a lower-than-expected cutoff price for the 7.26%, 2029 paper. 

 

The government today sold 50 bln rupees worth of the 7.32%, 2024 bond, 60 bln rupees worth of the 7.26%, 2029 bond, 20 bln rupees worth of the 7.69%, 2043 bond and 40 bln rupees worth of the 7.72%, 2049 bond.

 

The cutoff price for the 2029 paper was set at 100.21 rupees, 5 paise lower than the level estimated by 10 bond dealers polled by Cogencis. The cutoff prices for the longer-tenure bonds up for sale were higher than expected–indicating firm demand–while that for the 2024 paper was in line with the market's view. 

 

However, given that the 10-year benchmark paper, the most liquid bond in the market, had risen sharply earlier in the day, the lower-than-expected cutoff price set for the gilt dragged down bonds across the board, dealers said. 

 

The bid-cover ratio for the auction, derived by dividing the competitive bids received by the notified amount, was at 2.7 times, indicating tepid demand at the sale. The bid-cover ratio, a key metric of demand at gilt auctions, was at 3.4 times at last week's debt sale.

 

"Basically, the market is a bit heavy right now, prices have risen by close to a rupee in the last five days so there is a natural tendency to book profits," a dealer with another primary dealership said. "When people saw the cutoff for the 10-year there was a scramble to sell other bonds and buy the 10-year cheaply. But yields will fall as we head into the RBI's policy because of the rate cut and OMO hope. The 10-year yield should head to around 7.10-7.15%," he said.

 

Market-wide turnover was 529.80 bln rupees, lower than 705.35 bln rupees on Thursday, according to the RBI's Negotiated Dealing System-Order Matching platform.

 

OUTLOOK

 

Government bonds are not traded on Saturdays.

 

Prices are likely to rise sharply on Monday because of the RBI's decision to announce bond purchases under open market operations for June. The central bank said after trading hours today that it would purchase government bonds worth 150 bln rupees on Jun 13 in order to infuse durable liquidity in the banking system.

 

So far in the current financial year, the RBI has purchased bonds worth 250 bln rupees through open market operations. Given that the bond market is faced with a record-high gross bond supply of 7.10 trln rupees this year, additional buying support from the central bank would improve demand-supply dynamics.

 

Hope of the RBI reducing the repo rate at its monetary policy review in early June is also likely to support bond prices. Any sharp movement in US Treasury yields or crude oil prices may guide domestic bond prices.

 

Yield on the 10-year benchmark 7.26%, 2029 paper is seen in a band of 7.18-7.22% as against 7.23% at close today.

 

 

Friday

Thursday

SECURITY

PRICE   YIELD

PRICE    YIELD

6.84%, 2022

100.1825  6.7795%

100.1675  6.7842%

7.32%, 2024

101.4100  6.9576%

101.3600 6.9706%

7.17%, 2028

98.7475  7.3671%

98.6900  7.3761%

7.26%, 2029100.2200  7.2261%100.1300  7.2391%

India Gilts: Pare gains as auction cutoff for 10-yr gilt disappoints

 1535 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS
7.26%, 2029
PRICE (rupees)100.18100.40100.13100.35100.13
YTM (%)      7.23197.19997.23927.20727.2391

 

NEW DELHI–1535 IST–Government bonds gave up most gains because of profit booking and as the cutoff price for the 10-year benchmark 7.27%, 2029 bond at today's auction disappointed the market, dealers said.

 

The government today sold 50 bln rupees worth of the 7.32%, 2024 bond, 60 bln rupees worth of the 7.26%, 2029 bond, 20 bln rupees worth of the 7.69%, 2043 bond and 40 bln rupees worth of the 7.72%, 2049 bond.

 

The cutoff price for the 2029 paper was set at 100.21 rupees, 5 paise lower than the level estimated by 10 bond dealers polled by Cogencis. The cutoff prices for the longer-tenure bonds up for sale were higher than expected–indicating firm demand–while that for the 2024 paper was in line with the market's view. 

 

However, given that the 10-year benchmark paper, the most liquid bond in the market, had risen sharply earlier in the day, the lower-than-expected cutoff price set for the gilt dragged down bonds across the board, dealers said. 

 

Bond prices had jumped earlier in the day because the rupee's strength versus the dollar and a fall in crude oil prices spurred foreign portfolio investors to stock up on Indian sovereign debt.

 

Dealers do not see bonds falling much more though, as the Reserve Bank of India is widely expected to ease monetary policy and announce measures to support liquidity in the coming days. The RBI's Monetary Policy Committee will detail its next policy statement on Jun 6.

 

"The market had rallied quite a bit after the auction because of the heavy FPI buying so when the result was announced there was an immediate repricing," a dealer with a primary dealership said. "Yields will continue to have a downward bias in coming days because the RBI is expected to be dovish and support growth, but the downward move in yields will be gradual now till the policy. For now 7.22-7.23% (yield on the 2029 bond) is a fair level," he said.  (Bhaskar Dutta)


India Gilts: Up more on large purchases by FPIs, rupee's strength

 1125 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS
7.26%, 2029
PRICE (rupees)100.31100.35100.23100.35100.13
YTM (%)      7.21307.20727.22547.20727.2391

 

NEW DELHI–1125 IST–Government bonds rose further because the rupee's strength against the US dollar and a sharp decline in crude oil prices prompted foreign portfolio investors to make heavy purchases, dealers said.

 

The rupee was last at 69.6875 to a dollar, 0.5% higher than previous close. A stronger rupee enhances the returns that FPIs earn on Indian bonds, making these investments more appealing. FPIs' net outstanding investment in Indian sovereign bonds increased by 12.2 bln rupees today, data on the website of the Clearing Corp of India showed.

 

While the Bharatiya Janata Party's resounding victory at the Lok Sabha elections is seen paving the way for fresh foreign investment in government bonds, market players said the key factor that would shape such investment flows would be the rupee's trajectory against the dollar, especially as the bond market is faced with fundamental challenges such as oversupply of bonds and concerns about the Centre's finances.

 

A sharp overnight decline in crude oil prices also encouraged FPIs to step up purchases of Indian bonds, dealers said. Falling crude oil prices have a softening effect on India's inflation and ease pressure on government finances as the country is a major importer of the fuel.

 

"If the rupee appreciates over the next few days we can expect a reasonable amount of FPI inflow, especially as they had significantly cut down positions in Indian bonds before the elections," a dealer with a primary dealership said. "There are still concerns about the fiscal situation but if the RBI cuts rates, then we can see a lot more FPI interest from a trading perspective," he said.

 

Yield on the 10-year benchmark 7.26%, 2029 bond is seen in a band of 7.20-7.23% before the result of today's 170-bln-rupee gilt auction, dealers said.  (Bhaskar Dutta)


 

India Gilts: Up as crude, US ylds fall; gains capped post recent surge

 

 

 

0930 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS
7.26%, 2029
PRICE (rupees)100.25100.35100.25100.35100.13
YTM (%)      7.22177.20727.22177.20727.2391

 

NEW DELHI–0930 IST–Government bonds rose because of a sharp overnight fall in US Treasury yields and crude oil prices, although market participants refrained from taking large bets after the surge in prices over the last few days, dealers said.

 

Yield on the 10-year US Treasury note dropped 8 basis points to settle at 2.31% on Thursday, while crude oil for July delivery on New York mercantile Exchange declined over 5%, closing $3.51 lower at $57.91 per barrel. The crude oil contract for July delivery was last at $58.57/bbl in Asian trade.

 

A decline in US Treasury yields generally leads to flows of overseas investment into relatively high-yielding emerging market assets such as Indian government bonds. 

 

Falling crude oil prices have a softening effect on India's inflation and ease pressure on government finances as the country is a major importer of the fuel.

 

Yield on the 10-year benchmark 7.26%, 2029 bond has dropped 14 basis points so far this week as market players bet heavily on the Bharatiya Janata Party retaining power at the Lok Sabha elections, which would likely ensure continuity in economic policymaking. On Thursday, yield on the 10-year paper touched an intraday low of 7.19%, its lowest level in more than a year. 

 

While the BJP emerged victorious with a resounding majority, bond dealers said that a fresh fall in yields would be contingent on the Reserve Bank of India easing monetary policy, and announcing steps to supply liquidity in the banking system at its policy statement on Jun 6. Given the mounting risks to economic growth, some market players expect the central bank to announce measures to support liquidity before the policy review, possibly as early as this week.

 

Market participants also avoided heavy purchases before a 170-bln-rupee sale of dated securities today. The government is scheduled to sell 50 bln rupees worth of the 7.32%, 2024 bond, 60 bln rupees worth of the 7.26%, 2029 bond, 20 bln rupees worth of the 7.69%, 2043 bond and 40 bln rupees worth of the 7.72%, 2049 bond.

 

"It is difficult to break 7.20% (yield on the 7.26%, 2029 bond) till we have a rate cut and liquidity measures from the RBI," a dealer with a private bank said.

 

"Crude and the rupee are helping the market but even the rupee is not showing the sort of strength that was expected after the BJP's victory because there are global headwinds. For FPIs (foreign portfolio investors) to come in, there has to be a meaningful appreciation in the currency. Also, the biggest problem for the market, which is supply, remains. Today's auction should go through but unless Reserve Bank of India announces big OMOs (open market operations) supply will be a huge challenge," he said.

 

Yield on the 10-year benchmark 7.26%, 2029 bond is seen in a band of 7.21-7.24% before the auction result.  (Bhaskar Dutta)


India Gilts: Seen sharply up on plunge in crude oil prices, US ylds

 

NEW DELHI -Government bonds are likely to open sharply up today because of a steep fall in US Treasury yields and crude oil prices and as sentiment improved after the Bharatiya Janata Party's resounding victory in the General Elections.

 

Yield on the 10-year US Treasury note dropped 8 basis points to settle at 2.31% on Thursday, while crude oil for July delivery on the New York mercantile Exchange declined over 5%, closing $3.51 lower at $57.91 per barrel.

 

A decline in US Treasury yields generally leads to flows of overseas investment into relatively high-yielding emerging market assets such as Indian government bonds. 

 

Falling crude oil prices have a softening effect on India's inflation and ease pressure on government finances as the country is a major importer of the fuel.

 

The clear-cut majority for the BJP in the Lok Sabha elections has also been cheered by bond traders as it brings with it the likelihood of policy continuity and buttresses the government's ability to implement economic reforms. A stable government at the Centre is also seen as a factor that could encourage foreign portfolio investment in Indian government bonds.

 

However, given that the market is faced with fundamental challenges such as oversupply of bonds and concerns about the Centre's finances, a key factor that will shape overseas investors' appetite is the rupee's performance versus the dollar. A stronger rupee enhances the returns that FPIs earn on Indian bonds, making these investments more appealing.

 

Later in the day, bonds could take cues from the result of today's 170-bln-rupee sale of dated securities. The government is scheduled to sell 50 bln rupees worth of the 7.32%, 2024 bond, 60 bln rupees worth of the 7.26%, 2029 bond, 20 bln rupees worth of the 7.69%, 2043 bond and 40 bln rupees worth of the 7.72%, 2049 bond.

 

Yield on the 10-year benchmark 7.26%, 2029 bond is seen in a band of 7.18-7.24% as against 7.24% at close on Thursday.  (Bhaskar Dutta) End

 

US$1 = 69.5250 rupees

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

 

Edited by Maheswaran Parameswaran

 

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This copy was first published on the Cogencis WorkStation

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