Mumbai: The benchmark bonds fell for a third day on speculation investors will demand higher yields as the government sells record amounts of debt.
Yields on debt due 2018 climbed to the highest in a week after the government increased its borrowing target for the year ending 31 March by 80% to Rs2.61 trillion. The government plans to raise Rs3.62 trillion in the fiscal year starting 1 April, according to the interim budget unveiled on Monday.
The debt supply outlook is clearly negative and will weigh on the bond market, said Edward Lee, a fixed-income strategist at Standard Chartered Plc. in Singapore.
The yield on the 8.24% note due April 2018 climbed 6 basis points to 6.48% in Mumbai, according to the Reserve Bank of India’s (RBI) trading system. The price fell 0.47 per Rs100 face amount to 112. The yield earlier touched 6.57%.
The yield on the note has climbed 1.63 percentage points from a record low of 4.85% reached last month.
The yield curve will become steeper as the government increases supply and the central bank slashes interest rates, Tushar Poddar, a Mumbai-based economist at Goldman Sachs, wrote in a research note on Monday.
The curve, which plots the yields of different maturities, steepens when longer-dated bonds decline or short maturities rise or both happen simultaneously.
RBI’s open-market bond purchases will offer some support to the debt market and falling bank credit means more money will come into bonds, Krishnamurthy Harihar, treasurer at Development Credit Bank Ltd in Mumbai, said.