India’s 10-year bonds fell on Thursday, paring earlier gains, after yields rose at a state-debt sale, spurring concerns that investors are demanding more as supply of securities increases.
Yields, which move opposite to prices, rose from the lowest in a week after two states sold a total Rs1,400 crore of debt at 8.4%. At the last debt auction by a state government on 10 May, the yield was set at 8.34%. “The heavy supply of debt this month remains a concern for the market,” said Sanjeet Singh, a bond trader at Mumbai-based ICICI Securities Primary Dealership Ltd, which underwrites government debt sales.
The yield on the benchmark 8.07% note due January 2017 rose two basis points, or 0.02% to 8.12%, according to the Reserve Bank of India’s (RBI) trading system. The price fell 0.14, or 14 paise per Rs100 face value, to 99.65. Yields move inversely to prices.
West Bengal sold Rs1,000 crore of debt and Andhra Pradesh raised Rs400 crore through the sale, RBI said on Thursday.
The state debt auction came a day after the central bank sold Rs6,000 crore of bonds to drain excess cash from the banking system. The Centre is scheduled to raise a total of Rs18,000 crore via debt sales in May, the most in a single month in more than a year. It has already sold Rs10,000 crore of debt this month.
Bonds rose earlier on speculation that a government report due on Friday will show the inflation rate fell to the lowest since September. Inflation probably eased to 5.3% in the week ended 5 May, from 5.66% the previous week, according to a Bloomberg survey. The overnight borrowing rate has fallen more than 1% from its high this week, suggesting banks have more spare cash to buy debt.
“Bonds may rally some more since inflation is expected to remain low,” said R.V.S. Sridhar, vice-president (treasury), UTI Bank in Mumbai. “The liquidity situation in the market is comfortable right now and that’s also supporting bonds.”
RBI has increased borrowing costs nine times since October 2004 to curb price gains. The central bank forecasts inflation will slow to 5% in the current fiscal year to 31 March as higher interest rates damp consumer demand. The inflation rate will be at a “comfortable level” in the next two to three months, Montek Singh Ahluwalia, deputy chairman of the Planning Commission, had said on Wednesday.
The overnight borrowing rate in the money market was 8.13% on Thursday, after rising as high as 9.88% on 15 May. Lower money market rates make it less expensive for investors to buy debt with borrowed funds.
The cost of India’s interest-rate swaps, derivative contracts used to guard against the risk of an increase in borrowing costs, declined after the overnight money market rate declined. The five-year swap rate fell one basis point to 7.95%.