Mumbai: The yield on most traded 5-year bond edged lower on Wednesday on sporadic bargain hunting, but lingering worries about higher government borrowing kept longer paper under pressure.
The yield on the 6.07% bond maturing in 2014 ended at 6.61% after rising as high as 6.70%, compared with the previous close of 6.67%.
Volume was heavy at Rs105.85 billion ($2.2 billion) on the Reserve Bank of India’s trading platform.
India’s wholesale price index (WPI) is forecast to have fallen in the year to 6 June for the first time in at least three decades, heralding a period of annual deflation that analysts said could last up to four months.
The data is due by midday (12:00 pm) on Thursday.
The benchmark 10-year bond yield closed up at 6.89% from the previous day’s 6.88%, but only seven trades were done as trader interest remained muted on borrowing uncertainties.
Spreads between the 1-year and 5-year swaps were at 205 basis points, close to the lifetime peak of 213 basis points in early June.
“Although the curve has steepened considerably, supplies are keeping rates on higher side inspite of attractive carry,” said Bekxy Kuriakose, head of fixed income at DBS Cholamandalam Asset Management.
“Probably July onwards if the government reverts to original auction size then rates may improve,” she said.
The government has increased the size of its weekly auction by a quarter for five straight weeks, raising concerns it may borrow more than the gross Rs3.62 trillion slated in the interim budget for 2009-10.
A clearer picture is expected to emerge when the government unveils its final budget on 6 July. Stake sales in state companies and auction of third generation telecom spectrum could ease the pressure on market borrowing, traders said.
The RBI will buy back Rs60 billion of bonds on Thursday, ahead of Rs150 billion sale the following day.