Mumbai: The bond yields and swap rates ended down on Tuesday for the first time since the end-July monetary policy review, tracking a fall in US yields, with an improvement in domestic cash levels also supporting sentiment.
But, traders said the downward movement in bond yields and swap rates would not sustain as concerns of a rate increase in September, when the Reserve Bank of India’s mid-quarter policy review is due, and heavy bond supplies ahead would dominate sentiment.
US Treasury prices rose on Tuesday, driving the two-year yield to a fresh all-time low after a Wall Street Journal report raised the prospect of fresh bond buying from the US Federal Reserve.
The benchmark 10-year bond yield was at 7.81%, 5 basis points below the close on Monday when it had risen to 7.89%, its highest since 7 May, according to Thomson Reuters data.
Volumes were heavy at Rs104.60 billion ($2.3 billion) on the central bank’s trading platform.
The most actively traded one-year OIS rate was down 13 basis points at 6.31%. It had risen to 6.47% on Monday, its highest since 31 October 2008.
“Today, liquidity seems to be quite comfortable as there were no bids for LAF borrowing in the morning, but by mid-September there will be advance tax outflows of about Rs400 billion, which will create a tightness again,” said Mohan Shenoi, head of treasury at Kotak Mahindra Bank in Mumbai.
Banks’ repo borrowing averaged a net Rs389.63 billion a day in the two-week reporting cycle ended 30 July, down from Rs529.16 billion in the previous cycle, showing a narrowing cash deficit.
Banks did not borrow funds from the Reserve Bank of India on Tuesday, but parked Rs20.6 billion with the bank.
“There (is) also a possibility of a 50-basis point reverse repo and 25 basis point repo rate hike, so the slight pull-back is temporary,” Shenoi said.
He said the 10-year yield could touch 8% by September.
The central bank is scheduled to hold a mid-quarter policy review on 16 September, when it is widely seen lifting its key policy rates by at least 25 basis points.
The government is also due to sell Rs85 billion of treasury bills on Wednesday ahead of a Rs130 billion bond auction on Friday.
Heavy supplies in the absence of any significant inflows from maturing bonds are seen limiting the downward pressure on yields in the fiscal year to end-March 2011.