Mumbai: The federal bond yields climbed on Friday after the cut-off at a $2.2 billion debt sale was set higher than expected, indicating investor resistance to prices.
Stronger economic data and rising inflation pressures have strengthened expectations for a rate increase next year, a move that would further push up yields.
The 10-year benchmark bond yield ended at 7.58% from Thursday’s 7.54%. It has gained 10 basis points (bps) this week and is up 32 bps this month.
Traders said the yield could climb to 7.80-8% by the end of the month, when the rate increase expectations pick up.
Volumes were heavy at Rs93.35 billion ($2 billion) on the Reserve Bank of India’s trading platform.
The benchmark yield fell to 7.51% during trade after the government said industrial output rose 10.3% in October from a year ago, meeting a Reuters forecast but below the expectations of traders.
“The industrial number was good but it was not as good as the market expected. Even post auction the markets are not strong, so the market is I guess wary,” said Ashish Parthasarthy, treasurer at HDFC Bank.
Some traders had expected factory output to expand about 14%. Still, the figure suggested the economy was maintaining healthy momentum after annual GDP growth hit 7.9% in the September quarter, its strongest in 18 months.
“Numbers are coming strong in terms of growth and inflation so obviously monetary policy action is due now. It’s just a question of timing, so markets will be nervous,” Parthasarthy said.
The Reserve Bank of India (RBI) set a cut-off yield of 7.14% for the 2014 bond, 7.60% for the 2020 bond and 8.32% for the 2027 bond at the Rs100 billion auction.
Dealers said they would watch inflation data for November due on Monday to gauge the timing of the central bank’s policy action.
The wholesale price index probably rose to an annual 4.14% in November, fuelled by accelerating food prices, but this is unlikely to force the central bank to tighten policy this month.
“Let me reiterate that if inflationary pressure persists for a long time they can fuel inflation expectation and monetary policy will have to take a nuanced view on this,” RBI governor Duvvuri Subbarao had said on Wednesday.
With only a Rs90 billion bond auction next week and a two-week lull before the following sale on 8 January, there will be a respite in supplies.
The benchmark five-year interest rate swap closed at 6.78/81% from the previous day’s 6.79/83.
In interest rate futures on the National Stock Exchange (NSE), the December contract was at 7.9907%, above its previous close of 7.8878.
The yield implied in the March contract was 8.2188%, down from 8.2814%.