Mumbai: The benchmark federal bond yields hit two-month highs on Friday as industrial output data added to signs of recovery and an end to rate cuts, but found some late buyers that helped them close steady on the day.
There was some demand for 10-year bonds as yields neared 7%, with speculation that the government would not increase the scheduled size of next week’s bond auction, after increasing the past four by 25%, also generating buying interest.
The 10-year benchmark bond ended at 6.89%, level with Thursday’s close, after rising to 6.94%, its highest since 8 April, following the unexpected strength in the output data.
Industrial production rose 1.4% in April from a year earlier, beating forecasts for a fall, driven by a pick-up in domestic demand and adding to a view the economy was reviving.
“A rate cut is now practically ruled out. The market is also concerned at what stage the central banks around the world would withdraw the monetary accommodation. So based on that the general trend for yields is to edge higher,” said Vineet Malik, head of interest rates at HSBC India.
The 10-year bond yield rose 33 basis points this week.
The yield on the most traded 6.07% 2014 bond closed at 6.66%, above its previous close of 6.63%.
Volumes were a heavy Rs98.85 billion ($2.1 billion) on the RBI’s trading platform.
The market has been worried about the government’s borrowing needs for 2009-10 after it increased the size of the past four bond auctions by 25% to Rs150 billion each.
Traders were waiting for details of the 120 billion auction scheduled for next week, with talk that there would be no increase in the auction size.