By Anil Varma/Bloomberg
Mumbai: India’s 10-year bonds gained the most in a month as an increase in yields this week to the highest in more than seven months attracted investors.
Ten-year yields rose to the highest since August 2006 on 21 March, on concern that increased borrowing costs in the money market will spur banks to sell debt to raise cash. Bonds rose for a second day after the US Federal Reserve dropped its bias for higher rates at a meeting yesterday, adding to speculation the Reserve Bankl is nearing the end of a two-and-a-half-year series of rate increases.
“You may not get yields as high as these a week from now,” said Rajesh Babu, a trader at state-owned Andhra Bank in Mumbai. “Also, the Fed has left rates unchanged and indicated there won’t be more increases. Some banks are buying bonds to pledge them at the Reserve Bank’s repo counter in exchange for funds that they may lend at higher rates in the money market.”
The yield on the benchmark 8.07% note due January 2017 fell 7 basis points, to 7.97% as of 2:19 pm in Mumbai on 22 March, according to the RBI’s trading system. It reached 8.1% on 21 March. The price rose 48 paise per Rs100 face value, to Rs100.68. This is the biggest gain since 21 February.
Indian lenders can take overnight loans from the RBI at 7.5% by pledging government securities at the monetary authority’s daily repurchase auction. The RBI said on 21 March that such borrowings can be used to fund lending between banks, which are charging each other as much as 18% for overnight loans, according to data compiled by Bloomberg.
Banks borrowed a record Rs43,100 crore ($9.8 billion) at the RBI’s repurchase auction on 21 March, up from Rs35,000 crore the day before, according to RBI data.
Fed’s rate outlook
The Federal Reserve on 21 March kept the benchmark US interest rate at 5.25% and unexpectedly abandoned its tilt toward higher borrowing costs. The Federal Open Market Committee’s statement omitted a previous reference to “additional firming” in favour of the more general “future policy adjustments”.
Indian bonds pared gains on concern investors will demand higher yields when the government resumes its bond sales in the fiscal year starting 1 April.
“The government borrowing program for the next fiscal year is big,” said Poonam Tandon, chief of fixed-income at Securities Trading Corp. of India, a Mumbai-based primary dealer that underwrites debt sales. “There’s room for bonds to decline. The 10-year yield may rise as high as 8.25%.”
The government plans to raise as much as Rs1.55 lakh crore through bond sales in the coming fiscal year, up from Rs1.52 lakh crore in the current year.
Bonds also gained after the RBI reduced the amount of treasury bills sold at a weekly auction, causing a smaller-than-expected outflow of money from the banking system, Andhra’s Babu said.
The RBI sold bills worth Rs1,300 crore on 21 March, less than the Rs3,500 crore planned earlier.