Mumbai: The federal bond yields backed down from near-nine-month high, but ended higher on Tuesday ahead of a $2.5 billion bond auction on Friday.
Yields eased from the day’s high after finance secretary Ashok Chawla said there was no need to borrow more than the record budget target of Rs4.51 trillion in 2009-10, even after meeting expenses for drought relief.
The benchmark 10-year bond ended at 7.11% after rising to 7.16% in intra-day trade, the highest since 26 November 2008, the day the Mumbai terror attacks took place. It closed at 7.08% on Monday.
Volumes were a high Rs54.70 billion ($1.1 billion) on the central bank’s trading platform. The debt market will be shut on Wednesday due to a market holiday.
“The market derived some comfort from finance ministry’s comment that borrowing won’t be increased,” said Mahhendra Jajoo, head of fixed income at Tata Asset Management.
“Fundamentally there is still a need for stable to lower rates due to a poor monsoon.”
Monsoon rains have been 29% below average so far this year, which has pushed up food prices, hit rural income, threatens to hurt economic growth and has prompted several analysts to slash their 2009-10 growth forecasts for India.
“Factoring in negative agri growth but leaving industry and services unchanged, we cut our FY10 GDP estimates to 5.8% from 6.8%, but retain FY11 (2010-11) estimate at 7.8%,” Citigroup said in a note on Tuesday.
The central bank will auction Rs50 billion of 6.49% 2015 bonds, Rs50 billion of 6.90% 2019 bonds and Rs20 billion of 8.24% 2027 on Friday as part of its Rs120 billion bond sale this week.
“The 10-year bond should be an attractive buy above 7.20% levels. In the next auction we are expecting a cut-off yield of 7.20% which would be a good entry point,” Jajoo said.
The central bank will also buy back Rs60 billion of bonds on Thursday.
Dealers said they would watch out at what levels the central bank buys back bonds for further cues.
The benchmark five-year interest rate swap ended at 6.36/41%, above its previous close of 6.33/38%.