Informist Poll

Ten-year gilt seen at 7.11% May-end as yields bottom out

Informist, Wednesday, May 3, 2023

By Anjali and Aaryan Khanna

NEW DELHI - The 10-year gilt yield is likely to be largely unchanged at the end of May in the face of mounting supply pressures, as positive sentiment has already played out in the market in April when yields tumbled, pricing in eventual cuts in the policy rate.

According to the median of an Informist poll of 15 treasury heads, economists, and analysts, the yield on the 10-year benchmark 7.26%, 2033 bond at the end of this month is seen at 7.11%, against 7.12% at April end. On Tuesday, the 2033 bond ended at a yield of 7.09%.

Most Respondents Said The 10-year Yield Has Bottomed Out Near The Key 7.10% Mark, With any Cut In Interest Rates Still Distant

The 10-year benchmark yield fell 20 basis points last month after the Monetary Policy Committee decided to keep key rates unchanged at its meeting on Apr 6, against expectations of a final rate hike of 25 basis points. With the Reserve Bank of India's rate-setting panel opting to pause its rate hike cycle that began last May, traders stocked up on gilts betting that the committee's next action would be a rate cut.

However, most respondents said the 10-year yield has bottomed out near the key 7.10% mark, with any cut in interest rates still distant. Current yield levels have already factored in lower inflation and a moderation of growth, and market players will have to wait for domestic data to trend towards its assumptions before adding to their portfolios.

Consequently, enthusiasm and appetite for gilts may wane in May, with heavy supply lined up, respondents said. The government is scheduled to sell 1.36 trln rupees worth of gilts in May.

"In absence of a data surprise, it's local supply-demand dynamics that will lend direction to yields," said Churchil Bhatt, executive vice president at Kotak Life Insurance Co. "Yields have fallen a lot in anticipation of rate cuts. Going forward, we may need at least a promise, if not an actual rate action, in order to see further meaningful downside in yields."

After some widening of spreads between long- and short-term yields in April, this "steepening" of the yield curve may continue in May if supply pressures play out, respondents said. A majority of the government's 8.88-trln-rupee gross bond issuance in Apr-Sep is by way of bonds maturing over 14 years, with the 10-year gilt accounting for 20.5% of supply. In contrast, the three-year gilt and the five-year gilt make up for merely 18.0% of the supply in the first half.

Demand from insurance companies, which would make up a large portion of the demand for long-term bonds, remains unclear. Despite a month of supply behind it, the market does not have too much visibility of demand from insurance companies in 2023-24 (Apr-Mar). These firms were expected to deploy the funds they had received in a bumper March ahead of the end of the financial year, respondents said.

The month of May may see less volatility with no major data releases scheduled, except for the CPI inflation print on May 12, which is expected to be benign due to the statistical effect of a favourable base. Other than that, traders will look forward towards updated monsoon forecasts near the end of May, which are considered more accurate and have drawn the attention of MPC member Jayanth Varma.

Concerns abound of the El Nino phenomenon that may result in below-average monsoon rains in India this year. Private agency Skymet has already forecast a below-average monsoon, but government forecaster India Meteorological Department still expects average rainfall for the season.

"The data is not changing much, either on global or domestic front," Naveen Singh, head of trading at ICICI Securities Primary Dealership said. "If the news around monsoon is also not encouraging, if monsoon is erratic, then food prices will go up and then inflation would be affected too."

Amid a lack of significant domestic cues, global cues are expected to be the deciding factor in May, respondents said. The US Federal Open Market Committee is seen increasing benchmark rates by 25 basis points later today, that will most likely bring to an end an aggressive rate hike cycle. The US rate-setting panel has already raised its policy rate by 475 bps since March 2022.

While the rate increase is expected, US Federal Reserve Chair Jerome Powell's comments immediately after the decision will hold the key to the direction Indian gilts take. Traders back home keenly await a signal from the Fed that rate hikes are at an end, and seek guidance for a rate cut in the US. That is seen as a precursor for domestic rate cuts, and may open the floodgates to another buying spree and the 10-year gilt yield falling to 7% or under, respondents said.

Following are estimates for the yield levels/range in percentage for the 10-year benchmark bond at the end of May:

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