Mumbai: The 10-year government bonds gained on speculation a decline in money market rates will encourage banks to buy more debt with borrowed funds.
Overnight borrowing rates fell to the lowest since November 2005 today after the central bank capped daily investment by banks in its reverse repurchase auctions at one-eighth of the average amount they spent in a day at such sales last week. The limit, which took effect yesterday, spurred banks with spare cash to lend more in the money market, making borrowing cheaper.
“Banking system liquidity is good and call rates are easy,” said Rajesh Babu, a trader at state-owned Andhra Bank in Mumbai. “People are borrowing in the call money market and funding bond positions. The view on bonds is rather bullish.”
The yield on the benchmark 8.07% bond due January 2017 fell 1 basis point, or 0.01 percentage point, to 7.96% as of 3:06 p.m. in Mumbai, according to data compiled by Bloomberg. The price rose 0.06, or 6 paise per Rs100 face amount, to Rs100.76. Bond yields move inversely to prices.
The spread between the yield on the benchmark one-year bill and the 8.33% bond due June 2036 widened by 3 basis points today to 70 basis points.
The Reserve Bank of India on 2 March capped at Rs30 billion the amount of money it will absorb each day from lenders through its reverse repurchase auction.
Overnight Rate Falls
Banks put an average Rs238 billion a day last week into reverse repurchase sales. The rate banks charge each other on overnight loans was 5.88% today, compared with 6.15% a week ago, according to data compiled by Bloomberg. The rate declined to 5.2% earlier today, the lowest since 26 November 2005.
The gain in bonds was pared on speculation investors will demand higher yields as debt auctions this week increase the supply of the securities.
The central bank and the government plan to sell a combined Rs165 billion of new debt at bond auctions this week.
“There are some supply related concerns in the bond market and the sentiment is a bit bearish now,” said R.V.S. Sridhar, vice president of treasury at UTI Bank Ltd in Mumbai. “There’s supply at both the long end and the short end of the curve.”
The Reserve Bank will sell Rs60 billion of two-year debt today to absorb excess cash from the banking system. The federal government will sell Rs35 billion of treasury bills tomorrow and Rs70 billion of bonds on 9 March as part of its annual borrowing programme.
The cost of India’s interest-rate swaps, derivative contracts used to guard against the risk of an increase in rupee-based rates, increased. The five-year swap rate rose 1 basis point to 7.93%.