Mumbai: The federal bond yields rose on Tuesday after a 50% increase in this week’s bond auction from its scheduled size renewed concerns about government borrowing needs and triggered a sell-off, traders said.
The benchmark 10-year bond yield ended at 7.13%, above Friday’s close of 7.09%. The market was shut on Monday for a holiday.
“I think people were creating room for the state loan auction today, and of course, they were also concerned about the size of Friday’s auction,” said a trader at a foreign bank.
The auction, the last of the first half of the 2009-10 fiscal year, was increased to Rs120 billion from a scheduled size of Rs80 billion.
Volumes were a moderate Rs69.05 billion ($1.4 billion) on the central bank’s trading platform.
Traders are waiting for the second half borrowing calendar, which is expected next week. A finance ministry official said last week the government would stick to its full-year borrowing plan of Rs4.51 trillion.
If government planned to complete its borrowing well ahead of the end of the fiscal year, the market might react negatively on fears additional borrowing may be announced, traders said.
Nine states sold around Rs91.1 billion of loans on Tuesday. Traders said the auction cut-off yields were largely in line with market expectations.
The central bank is also due to sell Rs60 billion of treasury bills on Wednesday.
After market hours on Tuesday, the central bank said it would buy back up to Rs60 billion of bonds from the market at an auction on 24 September.
Dealers said a sharper rise in yields was prevented by expectations the central bank would not raise policy rates any time soon, and that a possible change in accounting rules on hold-to-maturity accounts for banks could support demand.
The market will also watch for cues from the US Federal Reserve’s policy meeting. It is widely expected to maintain its near-zero interest rate policy in order to help the economy pull out of its worst downturn in 70 years.
In interest rate futures trade on the National Stock Exchange (NSE), the December contract rose to 7.9508% from Friday’s close of 7.9347%. The March contract was at 8.2027%, up from 8.0827%.
The benchmark five-year interest rate swap ended up at 6.61/66% from its previous close of 6.58/63.