Mumbai: Bond yields rose to two-week highs on Monday as fresh worries on government finances emerged after it borrowed more than its short-term limit from the Reserve Bank of India (RBI) for the second consecutive week.
Higher-than-expected inflation and data showing some early signs of economic improvement were also reasons for the rise in yields as investors grappled with the possibility of an end to rate cuts by the central bank.
The 10-year benchmark bond yield ended at 6.37%, just off the day’s peak of 6.38% which was its highest since 20 April.
It climbed 14 basis points from its previous close of 6.23%, after a four-day weekend break.
Volumes were high at Rs103.15 billion ($2 billion) on the central bank’s trading platform with the 2019 bond being most actively traded.
The federal government borrowed Rs404.12 billion from the RBI in the week ended 24 April, the apex bank said in its weekly statistical supplement on Friday.
It was more than double the Rs200 billion ways and means advances limit, a short-term cash management facility allowing the government to borrow from the central bank to meet funding mismatches, for the first half of the 2009/10.
“It is likely that the government may issue more debt and additional treasury bill issuance looks like a good possibility,” said Anindya Das Gupta, director and head of treasury at Barclays Capital in Mumbai.
Some dealers said the rise in borrowings could be temporary and only a consistent increase in the coming weeks would be a cause for concern. The central bank may make up the shortfall from its intervention cash fund pool.
“Given the market borrowing calendar of over Rs500 billion per month, exceeding of Rs200 billion is not a big risk. Probably they would have factored it into their borrowing programme,” said J Moses Harding, head of global markets at IndusInd Bank.
The central bank sold Rs25 billion of a state development loan on Monday and would sell Rs90 billion of treasury bills on Wednesday. After market hours, the government said it would sell Rs120 billion of federal bonds on 8 May.
A manufacturing survey showed signs of a pick-up in activity for the first time in five months and inflation crawled higher due to firmer food and mineral prices, raising hopes of an economic revival in the second half of the fiscal year.
“The 10-year yield’s move towards 6.05% was a bit overdone. It should ideally be in the range of 6.25-6.50 given the various economic and liquidity conditions in the market,” Harding said.