Tag: Bond traders

G-secs react to the beginning of Fed taper

Banking & Finance

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Three things happened last week that made happy bond traders trim their long positions, at least, to a certain extent ahead of the second half borrowing calendar set to be released this week.

US treasury yields shot up after the Federal Reserve stated it could cut back on its bond purchases beginning November and conclude the process by the middle of 2022. The 10-year treasury yield climbed to 1.45 per cent on Friday from 1.37 per cent, the week before. The proximity of the taper process and the expectation of US Fed Funds rate to be increased by the end of 2022, brought forth risk-off trades in bond markets. The G-sec yields too rose from 6.14 to 6.19 per cent after the FOMC meeting. As one bond trader described, “When the US sneezes, the rest of the world catches a cold.”

And as if that wasn’t enough, crude prices continued to rise for the third straight week and hit close to three-year highs over global output disruptions, tightening inventories and persisting demand.

Key events back home

Higher crude prices tend to negatively impact bond prices due to the impact they have on fuel inflation and monetary policy decisions. On the domestic front, the Reserve Bank of India did come out with the much awaited G-SAP auction. The Central bank announced a simultaneous purchase and sale of securities which means the net liquidity injection into the market was nil. The Central bank conducted purchases of long tenor bonds maturing in 2028, 2031, and 2035, cumulatively amounting to ₹15,000 crore while selling short-tenor bonds maturing in 2022, also amounting to ₹15,000 crore. Next week too, the RBI will be conducting a similar operation of simultaneous purchase and sale of long and short tenor bonds, respectively. Bond market participants say that although it was a minor dampener, they have come to terms with the fact that the RBI may not be too comfortable with the high amount of liquidity prevailing in the market.

The benchmark yield hit 6.19 per cent last week having risen from the lows of 6.12 per cent seen the week before.

Going forward, the second half borrowing calendar and the monetary policy outcome in early October will be key events. In case the second half borrowing figure comes below ₹5-lakh crore, the benchmark yield could retest the 6.1 per cent level. However, if the borrowing figure is higher than ₹5.5-lakh crore, the 10-year yield could breach the 6.23 per cent level, traders say.

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Benchmark G-Secs can edge up from the current level

Banking & Finance

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The benchmark government securities yield fell 10 basis points last week to close at 6.155 per cent on Friday and the momentum is expected to continue this week, according to bond traders who are waiting keenly for the consumer price index (CPI) inflation to be released mid-September.

The rally in the G-Secs market came on the back of a combination of factors like the US Fed Chair Jerome Powell’s dovish stance at the Jackson Hole Summit, high domestic liquidity and absence of key triggers in the market.

Period of apprehension

Bond traders, however, had a period of apprehension post the monetary policy announcement earlier this month.

Indications from the RBI that it is beginning to normalise its monetary policy by balancing liquidity at the shorter end through VRRR, along with one of the MPC members expressing reservation about the accomodative stance, made the market nervous. A primary dealer said there were concerns that more members would convert to hawks.

Fed stance soothes nerves

Bond yields continued to rise gradually and reached a peak of 6.255 per cent ahead of the Jackson Hole summit. However, Powell’s dovish stance calmed the nerves with the benchmark yield moving 10 basis points lower last week to close at 6.155 per cent.

Moreover, traders indicate that there was significant foreign portfolio investors’ (FPI) participation in the G-Secs market last week, especially in long tenor papers.

Vijay Sharma, Senior Executive Vice-President, PNB Gilts said the worst of the inflation seems to be over.

“The situation on the fiscal side is also not bad. It looks like the GST collections are also doing really well. These factors should augur well for bonds in the coming times unless we encounter some unexpected events. We can say that the level of 6.25 is now well protected. The momentum being very strong, the market can rally up to 6.1-6.12 per cent also unless some event pierces the rally,” Sharma said.

Siddharth Shah, head of treasury at STCI Primary Dealer said, at 6.25 per cent levels, the market found comfort in going long.

“Furthermore, the Fed Chair’s speech gave some amount of comfort. With the SDL supply seeing reduction, expectations of additional borrowing diminishing on account of upbeat GST collections, replacement demand for bonds on account of G-SAP amidst high market liquidity, conditions became ripe for a rally in bond yields. The benchmark yield is now close to 6.15 per cent and has the potential to go further down to 6.10-6.12 per cent,” Shah said.

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