Mumbai: Bond prices dropped by the most in nearly a month on Monday, on speculation some investors are cutting their holdings with a view to reinvesting the proceeds at higher yields at an auction scheduled this week.
Yields on benchmark notes due 2019 climbed to a two-week high as the government prepared to offer bonds worth Rs12,000 crore.
The sale is part of the record Rs2.41 trillion the government plans to raise in the first half of the fiscal year that started on 1 April, to help fund stimulus spending.
“Adjustments to portfolios are going to be frequent because we have consistent supply for a few months and not an equally supportive outlook,” said Sanjay Arya, treasurer at state-owned Bank of Maharashtra, in Mumbai. “I am expecting yields to rise.”
The yield on the 6.05% note due February 2019 jumped 15 basis points to 6.37% at the 5.30pm close in Mumbai, according to Reserve Bank of India’s (RBI) trading system. The price declined 1.05 per Rs100 face amount to Rs97.67. A basis point is 0.01 percentage point.
West Bengal sold Rs2,500 crore of 10-year debt on Monday at a maximum yield of 7.1%, according to RBI.
The Union and state governments are borrowing more as they increase spending to counter the deepest economic slump since 2003.
Asia’s highest inflation-adjusted yields are increasing the appeal of Indian bonds, the region’s best performers last month, as slowing loan growth leaves banks with more cash to buy debt, Barclays Plc. said.
India’s one-year bond yields, adjusted for wholesale prices, have climbed to the highest in the region as the inflation rate slid to the lowest level in at least 27 years. The 3.8% real yield offered by India compares with 2.3% in China, 2% in Thailand and 1.7% in Indonesia.
Rising real rates will add some attraction to Indian bonds, Sailesh K. Jha, a senior economist at Barclays Capital in Singapore, said. With credit growth unlikely to pick up significantly and most people thinking there are still downside risks to economic growth, bonds may be in demand.