Indian investors light on duration, heavy on short-end ahead of budget

“Looking at the current levels, it seems the markets are light, especially on the long end, and are expecting a heavy borrowing calendar,” said Vijay Sharma, senior executive vice president at PNB Gilts.

“Chances of any positive surprise are more as major negatives are already factored in at current levels.”

India’s finance minister will present the country’s federal budget for 2023/24 on Feb. 1, with two sources telling Reuters that the gross market borrowing is expected to be below 16 trillion Indian rupees ($196 billion) as the government does not want to destabilise the bond market with any negative surprises.

Barclays and Goldman Sachs have predicted the borrowing to be higher, at 16.80 trillion rupees, and the former expects the benchmark 10-year bond yield to trade in a 7.50%-7.75% range in the April-June quarter amid a glut of fresh supply.

The benchmark 7.26% 2032 bond yield was last at 7.40%, 14 basis points above the lows hit earlier in the month on easing U.S. and domestic inflation.

Most market participants believe the 7.40% level on the benchmark paper should be the near-term peak and if there is any positive surprise in the borrowing schedule, the light positions are likely to trigger a rally.

“We see bond yields coming down after the budget announcement, which is unlikely to provide any negative shocks,” said Ritesh Bhusari, deputy general manager for treasury at private sector lender South Indian Bank.

Even as traders stay cautious on duration, they are slightly long on the shorter duration papers, leading to a steepening of the yield curve.

“Foreign banks have been bullish on the up-to-five-year segment as the market is convinced that rate hikes will end after February and hence, they may be shifting towards the shorter end of the curve,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

The Reserve Bank of India, in its policy decision on Feb. 8, is expected to raise interest rates by a modest 25 basis points to 6.50% and leave it at that level for the rest of the year, a Reuters poll of economists found.

The five-year 7.38% 2027 bond yield was at 7.24%.

Foreign investors have been adding positions in notes under the Fully Accessible Route, or bonds where there is no investment limit. They have bought bonds worth more than a net of 33 billion rupees under FAR to date in January, while selling other notes worth a similar quantum, CCIL data showed.

“Looking at the moves in OIS, there is some consensus among the foreign players that a larger rally may be witnessed in the up-to-five-year part of the curve, while the bulk of the supply would be dominated at the longer end,” said a trader with a foreign bank.

The five-year overnight indexed swap (OIS) rate was at 6.23%, down 20 basis points in January.

Mutual funds have also been cutting down on their government positions, with market participants stating that a bulk of the selling has been in higher duration papers for fear of stop losses being triggered on budget day.

These funds have net sold bonds worth 72 billion rupees so far in January, after net purchases of 211 billion rupees in October-December.

This story has been published from a wire agency feed without modifications to the text.