Mumbai: The bond yields and swap rates ended marginally higher on Thursday as a $2.6 billion bond sale on Friday, economic data due next week and prospects of further monetary policy tightening kept sentiment cautious.
But a further upside to yields was capped on replacement demand for a bond, which is due for redemption this month, with lower US yields supporting domestic bond prices.
The yield on the benchmark 10-year bond ended up three basis points on the day at 7.60%. It traded in a band of 7.58-7.61% during the day.
Volumes were heavy at Rs56.6 billion ($1.2 billion) on the central bank’s trading platform.
The one-year swap closed at 5.68%, up four basis points from Wednesday’s close.
The benchmark five-year swap rate closed up two basis points at 6.77%.
“Yields are up because of the auction tomorrow and possibility of a 25 basis point rate hike in the policy review,” said Roy Paul, treasury head at Federal Bank in Mumbai.
The government will sell Rs120 billion of bonds as scheduled on Friday.
Traders said the bond auction result would be keenly watched for market demand for debt and the cut-off levels would reflect the level of yields the Reserve Bank of India (RBI) is comfortable with.
In a surprise move, the RBI raised its key lending and borrowing rates by 25 basis points last Friday, and is expected to raise rates again in its quarterly review on 27 July, a new survey found.
“A redemption is there this month so there is going to be some buying interest for replacement. Also, due to the balance sheet growth in the quarter ended June, SLR requirement will also be slightly high in July,” Federal Bank’s Roy Paul said.
The 11.30%, 2010 bond worth Rs302.35 billion is due to mature at month-end. Statutory Liquidity Ratio (SLR) is a mandatory tool of the central bank that requires commercial banks to invest at least 25% of their deposits in government securities.
India’s food inflation eased, but fuel inflation accelerated in late June and a recent hike in fuel prices kept the case for the central bank to top up its last Friday’s rate hike when it reviews policy on 27 July.
Bond yields and swap rates were little changed after the food and fuel inflation data traders said they are awaiting the inflation and industrial production data for June next week for cues.
Traders said they were also watching US cues for direction.
US Treasury prices drifted higher in Europe on Thursday, erasing earlier losses as appetite for safe-haven government bonds returned on signs the rally in US stocks will stall.
In interest rate futures on the National Stock Exchange, the September contract implied a yield of 8.0331%, while the December contract was not traded.