Tag: G-Sec

Bond yields trend higher despite softer inflation

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Benchmark yield closed marginally higher this week despite positive inflation data even as rising crude prices, higher US treasury yields and domestic liquidity factor take precedence.

During the monetary policy, the Reserve Bank of India (RBI) halted the G-SAP programme while saying it would increase the quantum of VRRR auctions to Rs6 lakh crore by December.

The central bank last week conducted an 8-day Variable Rate Reverse Repo auction in which the cut-off yield came in at 3.9 per cent. In comparision, the cut-off for a 7-day VRRR auction had come in at 3.61 per cent in the first week of October. The increasing cut-off seems to reflect the central bank’s comfort in paying a higher rate to remove excessive liquidity.

On the positive side, retail inflation dropped to a five-month low of 4.35 per cent in September. Bond market participants are of the view that the next inflation print will most likely come in below 4 per cent due to a favourable base effect. Post that, there could be some rise in inflation, they say.

However, it seems the days when market cheered this sort of news seem to be over, at least temporarily so, as other factors weigh heavily on traders’ minds.

Rising crude price

The halting of G-SAP comes at a time when crude prices are gaining an upward momentum. Brent crude prices closed near the $85-mark last week, having risen by almost $2.5 in a week. To give a context, it has risen by almost $7 / barrel since the beginning of the month.

At the same time, the 10-year US treasury yield touched 1.63 per cent last week, before cooling to 1.575 per cent.

Bond dealers say if both the crude and the US treasury yields continue to rise, it could have an impact on the domestic yields.

Vijay Sharma, senior executive vice-president at PNB Gilts opines that the market is mainly looking at only these two factors.

“Rising crude prices and hardening US Treasury yields are the main factors that are driving the G-Sec yields higher. Under these adverse global conditions, the withdrawal of G-SAP has exacerbated the upmove. The market already knows that the next inflation print would likely come in below 4 per cent given the low base effect. Market participants will be watching out whether at 6.35-6.4 per cent levels, will the RBI do something to stabilise the yields. If crude prices and US treasury yields stabilise, the benchmark bonds could find demand returning at close to 6.4 per cent,” Sharma said.

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Pivotal week for Indian traders may pave way for foreign inflows

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Indian investors face a crucial week with announcements due on a key index review for the nation’s bonds and also on the government’s borrowing plan for the next six months.

FTSE Russell will announce its annual review for equity and fixed-income markets on Thursday, with Indian debt already on a watchlist for potential upgrading. While the government has yet to say when it will announce its next borrowing program, officials from the central bank and finance ministry will decide the plan on Monday, people familiar have said.

“This week will lay the ground for the second half of the year, and could be an inflection point for the markets,” said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd. in Mumbai. “Bond index inclusion could be a game changer for India, luring massive foreign inflows.”

G-secs react to the beginning of Fed taper

The rupee has declined about 1 per cent this month so far, and is among Asia’s worst performers, as the Fed’s hawkish pivot strengthened the dollar, even as the Reserve Bank of India has maintained its easy stance. A potential inclusion by FTSE Russell may pave the way for big foreign inflows and burnish the rupee and bonds.

The rupee appears poised for more near-term losses against the greenback given the currency pair’s slow stochastics, a momentum indicator, signalling it is still not in the oversold territory against the dollar. However, any further losses may be limited given initial rupee support around 74 level.

Bond markets await RBI move

Indian bonds are already heading for the biggest monthly gain since April, and may get a further boost if the government decides to cut back borrowing for the second half of the fiscal year as revenue improves.

Index addition looks more imminent after a finance ministry official earlier this month said the nation has completed most of the work required to be a part of the global benchmarks

India’s inclusion in the global bond indexes, expected by early 2022, may attract as much as $250 billion of inflows in the next decade, according to Morgan Stanley, which sees the 10-year bond yields to ease to 5.85 per cent in 2022 from 6.18 per cent on Friday. The move may lead to the rupee gaining by more than 1.5 per cent to 72.50 per dollar, from Friday’s close, according to HDFC Securities Ltd.

Indian bonds are also under review for inclusion by JPMorgan Chase & Co., which typically assesses its index this month, while Bloomberg Index Services Ltd. last week said there is currently no estimated timeline in place for India’s inclusion in the Bloomberg Global Aggregate Index.

An index inclusion “could be a big trigger, leading to rapid appreciation in the rupee,” said Dilip Parmar, analyst at HDFC Securities. “The central bank may not be too aggressive in buying or selling dollars, and may give time for the rupee to adjust to the market.”

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RBI to introduce new 10-year G-Sec

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The Reserve Bank of India has decided to introduce a new 10-year Government Security (G-Sec), which will become the benchmark paper, through which the government will borrow ₹14,000 crore at the upcoming auction on Friday.

This announcement was expected by market participants as the outstanding limit in the current 10-year G-Sec/GS (coupon rate: 5.85 per cent) has reached about ₹1.20-lakh crore. At this level of outstanding amount, usually, a new 10-year G-Sec is issued.

Moreover, the RBI has mopped up about three-fourth of the 5.85 per cent GS via its G-Sec Acquisition Programme and special open market operations, and the trading volume in this paper has been gradually drying up.

Since the 5.85 per cent 2030 GS was first issued on December 1, 2020, its yield has jumped about 25 basis points to close at 6.0877 per cent on Monday, with the price declining about ₹1.82 to ₹98.31.

Overall, the government will be borrowing ₹26,000 crore on Friday through auction of the 4.26 per cent GS 2023 (₹3,000 crore), New GS 2031 (₹14,000 crore) and 6.76 per cent GS 2061 (₹9,000 crore). It will also have the option to retain additional subscription up to ₹6,000 crore against the above security/securities.

G-SAP 2.0 on July 8

A day prior to the auction of the aforementioned G-Secs, the RBI will be purchasing five G-Secs aggregating ₹20,000 crore under its G-Sec Acquisition Programme (G-SAP 2.0) on July 8.

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RBI’s first purchase of G-Secs under GSAP 2.0 for Q2 on July 8

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The Reserve Bank of India (RBI) will buy five Government Securities (G-Secs) aggregating ₹20,000 crore under its G-sec Acquisition Programme (G-SAP 2.0) on July 8.

This will be the first purchase of G-Secs under G-SAP 2.0. The central bank will be purchasing five G-Secs, maturing between 2027 and 2033.

Overall, in the second quarter, the central bank will conduct open market purchase of G-Secs of ₹1.2 lakh crore under the G-SAP to support the market.

Under G-SAP 1.0, RBI committed upfront a specific amount (₹1-lakh crore in the first quarter of FY22) of open market purchases of G-Secs to enable a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions.

“The endeavour (of G-SAP) will be to ensure congenial financial conditions for the recovery to gain traction…The positive externalities of G-SAP 1.0 operations need to be seen in the context of those segments of the financial markets that rely on the G-sec yield curve as a pricing benchmark,” RBI Governor Shaktikanta Das said in a statement on April 7, 2021.

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Investors’ interest in 2030 G-Sec wanes

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Bond market players seem to have lost interest in the so-called 10-year benchmark Government Security (G-Sec) as the central bank has accumulated a chunk of this paper, reducing its attractiveness for trading.

The number of trades in the 2030 G-Sec (carrying 5.85 per cent coupon rate) has shrunk drastically from 993 on May 28 to 31 on June 29.

The Reserve Bank of India (RBI) has been mopping up this paper via Special Open Market Operations (OMO) and G-Sec Acquisition Programme (G-SAP).

This is aimed at keeping G-Sec yields on a leash as the government has a huge borrowing programme of ₹12.10 lakh crore in FY22. RBI has been focussed on buying this paper to ensure a stable and orderly evolution of the yield curve.

New benchmark

Given that the central bank is holding almost three-fourth of the ₹1.20 lakh crore outstanding amount in the 5.85 per cent 2030 G-Sec and liquidity has dwindled in this paper, market experts say it’s time the government introduced a G-Sec maturing in 2031, which will become the new 10-year benchmark.

They emphasised that at the weekly auctions of the 5.85 per cent 2030 G-Sec over the last one month or so, RBI has either devolved it on primary dealers (PDs) or rejected all the bids as investors want to buy it at a lower price (or higher yield).

Referring to the tug-of-war between institutional investors and RBI, experts say investors want the yields to go up, but the central bank wants to suppress the yields to ensure that the government can borrow at a cheaper rate.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “They (Government) may float a new 10-year G-Sec after a week or two. Nobody has interest in the 5.85 per cent 2030 G-Sec.

“About three-fourth of this paper is with RBI and the rest is with nationalised banks. So, who will trade in it? There is no tradability in this paper.”

Madan Sabnavis, Chief Economist, CARE Ratings, observed that the market is still demanding more (in terms of yield) from the government given the large borrowing programme as well as the rising inflation trend.

Since the 5.85 per cent 2030 G-Sec was first introduced on December 1, 2020, its price has declined by ₹1.455 to Rs 98.67 on Tuesday, with its yield rising about 20 basis points to about 6.04 per cent. Bond price and yields are inversely related and move in opposite directions.

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RBI’s short-term paper devolves; 10-year G-Sec unsubscribed

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Government securities (G-Sec) prices dropped on Friday as the weekly G-Sec auction saw the short-term paper devolve on primary dealers (PDs) and the 10-year paper going unsubscribed.

Price of the benchmark 2030 G-Sec (coupon rate: 5.85 per cent) declined about 12 paise over the previous close, with its yield going up about 2 basis points. This paper was last traded at ₹98.725 (yield: 6.0285 per cent).

Bond yields and price are inversely related and move in opposite directions.

At the auction of the 2023 G-Sec (4.26 per cent), almost 97 per cent of the notified amount of ₹3,000 crore devolved on PDs. PDs are financial intermediaries which support the Government’s market borrowing programme and improve the secondary market liquidity in G-Secs.

Though the RBI received 99 bids aggregating ₹18,782 crore against the notified amount of ₹14,000 crore at the auction of the 10-year G-Sec, it neither accepted any bids nor did it devolve the paper on PDs.

The only paper that got fully subscribed was the 2061 G-Sec (6.76 per cent). In fact, green shoe amount of ₹48.454 crore was accepted over and above the notified amount of ₹9,000 crore.

Hardening yields

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “In last few days, yields have been hardening at short end. With inflation inching upwards, Brent crude up…there are fewer bidders for short papers. Probably due to this the paper got devolved.”

Irani observed that volumes in the existing 10- year benchmark are dropping on expectations of a new benchmark being issued. Probably, the bids were at uncomfortable levels, resulting in RBI not accepting any bids at the auction of this paper.

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RBI’s heavy lifting helping govt borrow at lower cost

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The Reserve Bank of India (RBI) had clearly saved the day for the government in helping it borrow money at lower cost during the January-March 2021 quarter, despite spike in its borrowings, the latest quarterly public debt management report showed.

The government announced additional borrowing of ₹80,000 crore for FY21 in the Budget on February 1 this year, which led to a situation where the market found it difficult to absorb the supply. The yields also reacted negatively due to high fiscal deficit proposed in FY22 and higher-than-projected fiscal deficits for coming year.

Besides, rising crude prices and the gross borrowing amount of ₹12.06 lakh crore — more than market expectations — contributed to the hardening of the yields.

However, it is the RBI’s Monetary Policy Committee which gave comfort to the market by keeping Repo rate unchanged at 4 per cent at its meeting on February 5 and also announced the continuing with accommodative stance as long as necessary — atleast during the current financial year (2020-21) and into the next financial year (2021-22), the report highlighted.

OMO, G-Sec and Yield

The continuous announcement of Open Market Operations (OMO) by RBI, the US Federal Open Market Committee’s to keep interest rates near zero through 2023, lower demand by the real sector, cancellation of G-sec auction in the last week of March supported the yield, the quarterly public debt management report released by the Finance Ministry on Friday highlighted.

Commenting on the finance ministry’s report, Madan Sabnavis, Chief Economist, CARE Ratings, told BusinessLine: “Public debt management report of the government released today shows that the RBI played a critical role in managing the yield curve in FY 21 and hence facilitated a large government borrowing programme. While the room to lower repo rate below 4 per cent was limited large purchase of around ₹3 lakh crore of OMOs as well as operation twist (where different maturities are bought and sold) combined with TLTROs helped to stabilise the yields at a time when there was too much paper in the market”.

He highlighted that the same scene continues this year too with the RBI overtly stating that one of the objectives of the monetary policy is to manage the yield curve.

Liquidity woes

Meanwhile, a report from CARE Ratings on Friday highlighted that ₹26,000-crore government paper auctioned by the RBI on Friday saw a mixed response. Once again, the response to the 5.85 per cent 2030 paper was negative and it went unsubscribed. There have been two earlier occasions when the ten-year paper devolved on the primary dealers.

The market is still demanding more from the government given the large borrowing programme as well as the rising inflation trend, according to CARE Ratings. Since the beginning of the pandemic last year, the RBI has had to face the challenge of providing enough liquidity to finance the increased government borrowing without allowing interest rates and bond yields to rise. The central bank continues to face the same challenge in the current fiscal too, say economists.

The other major concern is that despite adequate liquidity infusion and reduction in interest rates, the growth of credit has remained at a low pace.

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RBI pays higher-than-expected price to buy 10-year G-Sec

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The Reserve Bank of India paid about 38 paise more to purchase the 10-year Government Security (G-Sec) under the third tranche of the G-Sec Acquisition Programme 1.0 in a bid to keep bond yields on a tight leash.

The central bank bought this G-Sec (coupon rate: 5.85 per cent) at ₹98.99 (yield: 5.991 per cent) against the previous close of ₹98.6075 (6.045 per cent).

The move to buy the aforementioned security at a higher price had the desired effect as it closed about 18 paise higher at ₹98.79 than the previous close, with the yield declining about 3 basis points to 6.0192 per cent.

Bond yield and price are inversely related and move in opposite directions.

Under G-SAP 1.0, the central has committed upfront to a specific amount (₹1-lakh crore in the first quarter of FY22) of open market purchases of G-Secs to enable a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions.

Of the six G-Secs and State development loans of 12 States the central bank intended to buy aggregating ₹40,000 crore, it invested about 67 per cent of the amount (or ₹26,779 crore) in buying the 10-year paper.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “the 10-year G-Sec is the most widely-traded security. It is the signalling rate. Most of the borrowing is in the belly (10-year to 15-year) of the curve.

“In the last two days, prices had fallen based on the upcoming Fed event and profit booking. So probably it was bought 38 paise up.”

He underscored that most of the float is with RBI in 10-year benchmark paper.

“Probably RBI gave an exit to investors holding this paper so that those they can participate in auctions going ahead and support the borrowing,” Irani said.

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10-year G-Sec auction sees devolvement

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Government securities (G-Secs) prices rose on Friday despite the Reserve Bank of India (RBI) devolving the 10-year benchmark G-Sec on primary dealers (PDs) at the weekly auction.

Market participants attributed this to the aforementioned security being among the six G-Secs RBI will be buying under the third tranche of open market purchase of G-Secs under the G-Sec Acquisition Programme (G-SAP 1.0).

Though the cut-off price at the auction of the 10-year G-Sec came in at ₹98.97 — about 19 paise higher than previous closing price (of ₹98.7850) — bond dealers say many of the bids would have been below Thursday’s closing price, leading to devolvement of the paper PDs.

PDs, who underwrite G-Sec auctions, had to pick up ₹9975.763 crore worth of this paper out of the total notified amount of ₹14,000 crore.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said the central bank has kept the yield on the 10-year on a tight leash in view of the large Government borrowing programme amid the Covid-19 pandemic, while the market players want it to leave the yields to market forces.

Keeping yields in check

Irani observed that G-Sec prices did not fall despite devolvement of the 10-year G-Sec on PDs as market participants know that RBI will buy this security through G-SAP.

In the secondary market, the benchmark 10-year G-Sec coupon rate: 5.85 per cent) rose 9 paise to close at ₹98.875 (previous close ₹98.785), with the yield declining about a basis point to 6.0072 per cent (6.0199 per cent).

Bond yield and price are inversely related and move in opposite directions.

The auction of the other two G-Secs — 4.26 per cent GS 2023 and 6.76 per cent GS 2061 — sailed through.

Under G-SAP, RBI commits upfront to a specific amount of open market purchases of G-Secs with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions. According to State Bank of India’s economic research report “Ecowrap”, the G-SAP programme of the RBI has been largely successful in keeping the bond yields in check.

However, to make the impact more meaningful, RBI may consider shifting the focus on 7-8 year papers while announcing Open Market Operation/ G-SAP, etc., it added.

“This will smoothen the curve and also reduce upward pressure on benchmark yield. Additionally, RBI can also come up with a prior calendar of bucket-wise maturity for GSAP-2.0,” Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said.

Furthermore, more purchases might be done in illiquid securities compared to liquid securities in each bucket. Accordingly, banks will be able to offload their HTM (held-to-maturity) stocks and buy liquid ones.

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