Mumbai: Indian federal bond yields eased on short covering on Tuesday, after rising to 16-month highs in the previous session, but traders said the downward move would be short-lived and yields are seen heading north in the long term.
At 10:47 am, the yield on the benchmark 10-year bond was 7.86%, after falling as low as 7.83% in early deals. It had ended at 7.88% on Monday after rising to 7.97%, its highest since 15 October 2008.
Volumes were a moderate Rs25.80 billion ($558 million) on the central bank’s trading platform.
The benchmark five-year interest rate swap was at 7.10/14%, from the previous close of 7.12/15%.
“The recent selling was based on inflation and industrial production data and the market is light now, so the people who had sold are covering now,” said Murthy Nagarajan, head of fixed income at Tata Mutual Fund.
“The long-term trend is for yields to go up and in April-June the 10-year yield would be around 8.25-8.50% because then supply will come,” he added.
India’s headline inflation in January accelerated to its fastest pace in more than a year, vaulting above the central bank’s end-March inflation forecast and putting more pressure on the bank to raise borrowing rates.
Industrial output, released on Friday, smashed forecasts to grow at its fastest pace on record in December, in further evidence of a strong economic recovery that could allow the government to follow the Reserve Bank of India (RBI) in withdrawing stimulus.
Dealers said worries about heavy borrowing in the next fiscal year were also keeping pressure on bond yields as debt supplies comparable with this year’s record gross 4.51 trillion rupees would result in a weak demand for debt.
The government will outline its borrowing programme for the next fiscal year at its budget scheduled on 26 February.
“There are no positive vibes to look for significant reversal in bond yields with only hope on RBI to spell out its strategies to address the demand-supply mismatch in the medium/longer tenor bonds when FY11 borrowing kicks in,” J. Moses Harding, head of global markets at IndusInd Bank said in a daily note.