Mumbai: Bond yields dropped on Wednesday as sentiments eased over additional debt supplies after the Reserve Bank of India (RBI) announced it would start buying government bonds at auctions.
The yield on the 8.24% 2018 federal bond ended at 6.30%, off an early low of 6.25% but still below Tuesday’s close of 6.49%.
“The scene has shifted from macroeconomic fundamentals to technicals like demand and supply,” said K. Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund.
“Every auction is likely to push yields higher as the supply is quantified while the demand is not,” he said.
Last week, the Yield on 2018 bond hit an eight-week high of 6.53%. After falling to an all-time low of 4.86% in early January, it has spiked 144 basis points (bps) on extra borrowing concerns.
The RBI said on Tuesday it would borrow a bigger-than-expected Rs460 billion between 20 February and 20 March, spooking markets and sending yields higher.
The figures were sharply above market expectations of Rs300-400 billion of extra borrowing, and would bring the government’s borrowing in 2008-09 to Rs2.6 trillion - twice its initial budget estimate.
But the apex bank said it would buy government bonds from investors via auctions starting from 19 February.
Volumes were a high Rs62.05 billion ($1.3 billion) on the RBI’s trading platform with the 2018 bond being most traded.
Ramkumar said the central bank (RBI) needed to provide details of which securities it would buy, the amount and the level at which they will be bought.
Dealers said the market was keenly eyeing an Rs80 billion bond sale on Friday, which could provide cues on investors’ appetite for the upcoming flow of debt.
Inflation and industrial data, due on Thursday, are also awaited. Lower-than-expected inflation and dismal industrial numbers may fuel appetite for debt in anticipation of further interest rate cuts, dealers said.