Mumbai: The federal bond yields fell on Monday, helped by a smaller auction set for this week and bargain buying after sharp recent fall in prices.
After market hours on Friday, the Reserve Bank of India (RBI) said it would auction Rs110 billion ($2.3 billion) of bonds on 11 September, less than the Rs120 billion it has been selling since the beginning of the fiscal year in April.
Dealers said the auction of a three-year paper as part of Friday’s bond sale was seen positively by traders as the shorter tenor was likely to attract good demand.
The 10-year benchmark bond yield fell to as low as 7.27% before ending at 7.29%, well below 7.47% at close on Friday when it had climbed to 7.50% during trade, which was its highest since 18 November.
Volumes were heavy at Rs160.55 billion on the central bank’s trading platform.
“The selection of a three-year paper for Friday’s auction shows that the RBI is taking concrete steps to prevent yields from rising and it is not comfortable with the higher yields,” said Bekxy Kuriakose, head of fixed income at DBS Cholamandalam Asset Management.
“The rally is also because of technical factors as traders were already sitting light after the recent sell-off.”
The government has sold Rs2.82 trillion of bonds so far in the current fiscal year from the Rs2.99 trillion targeted in the first half. It plans to raise a total of Rs4.51 trillion in 2009-10.
“Yields could ease as supplies in the second half of the year are lesser but rising inflation could play spoilsport,” Kuriakose said.
The wholesale price index inflation could rise to 6.5% year-on-year by March 2010, higher than the central bank’s projection of 5%, Nomura said in a recent note.
“There are signs that the sharp decline in core inflation has been arrested and prices have started to inch higher,” economist Sonal Varma wrote.
The central bank will also auction Rs83.5 billion of state loans on Tuesday and Rs90 billion of treasury bills on Wednesday.
In interest rate futures on the National Stock Exchange (NSE), the December contract closed at Rs92.58, above Friday’s Rs91.94. The March contract ended at Rs91.3325, above the previous close of Rs91.0275.
The benchmark five-year interest rate swap ended at 6.34/39% from 6.40/45.