Benchmark bonds drop as traders scale back cut hopes


Mumbai: Benchmark sovereign bonds dropped in India as traders dialed back bets of large easing after a split verdict on the size of Wednesday’s reduction, and as the central bank said it would calibrate further cuts.

The yield on the 10-year debt rose three basis points 6.37%, even as shorter-tenor bonds rallied. The rupee fell 0.1% to 70.8887 per dollar, while stocks drifted lower after changing direction at least six times.

The Reserve Bank of India (RBI) lowered its benchmark rate by an unprecedented 35 basis points to 5.4%, with Bank of America Merrill Lynch being the sole participant in a Bloomberg survey to correctly predict the move.

Four of the six-member panel voted for a 35-basis points cut, with two voting for a 25-basis point reduction. Hopes of chunkier easing were dashed after Governor Shaktikanta Das said the authority would calibrate further cuts depending on incoming data.

“What they are indicating is that they have used whatever space was available to them, and for further rate cuts, the data has to deteriorate a lot, which is weighing on the bonds,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd.

Curve steepening

There was some bullishness in at least one corner of the debt market. Shorter-end bonds climbed as the bigger-than-expected easing and the assurance on adequate liquidity caused the yield curve to steepen. The yield on the second-most traded 7.32% 2024 bond declined seven basis points to 6.15%.

Shorter-tenor securities got more than the 25-basis points reduction they were looking for, according to ICICI’s Singh. “Hence, that end is performing.”

Benchmark yields declined 51 basis points in July amid a global bond rally that saw funds flocking to rupee debt amid a sea of negative global yields. Their purchases of $1.2 billion of bonds last month was also prompted by the government’s pledge to keep its budget deficit in check and a proposal to shift a part of the record federal borrowing overseas.

The latest escalation in the US-China trade war has sent investors rushing once more to haven assets, pushing the world’s stockpile of negative-yielding bonds over $15 trillion. The Trump administration labeled China a currency manipulator after the Asian nation led the yuan slide past 7 to the dollar on Monday.

The benchmark 2029 bond was also dragged lower as its current outstanding stands at 88,700 crore ($12.5 billion), adding an illiquidity premium to the paper.