Mumbai: Indian federal bond yields soared to three-and-half-month highs on Thursday as investors braced for heavy supplies even as a fresh batch of data showed economic conditions worsened.
Investor appetite remained dented as the government was expected to pump up its bond issuances to meet a fiscal deficit that was already near double digits, traders said.
Benchmark yields have jumped 185 basis points so far this year even as the central bank has slashed rates by 100 basis points.
At 1:42pm, the 2018 federal bond yield was at 7.06 percent after hitting 7.11%, its highest since 28 November, 2008. The yield had closed at 6.84% on Monday and the following two days were holidays.
A total of Rs341 billion ($6.6 billion) of federal and state paper is expected to hit the debt market in a holiday-shortened week, while the central bank is buying back up to Rs105 billion on Thursday.
“There are no positives for the market and the central bank’s open market operations are also not very market friendly as most papers it plans to buy back are illiquid and not widely held,” said Satish Jeurkar, head of fixed-income at Saraswat Co-operative Bank.
Volume was low at Rs30.65 billion on the central bank’s electronic trading platform with the 8.24% 2018 bond being the most heavily traded.
Traders said the sharp rise in bond yields blew out a bunch of stop-loss positions around 7%, forcing some traders to sell bonds aggressively.
Excluding redemptions of intervention bonds, ICICI Securities estimates the market faces supplies of Rs4.5 trillion in 2009/10 against an investor demand of Rs3.05 trillion, underlining the demand-supply gap.
The yield curve, a gauge for expectations of interest rates in the economy, steepened to its highest level in eight years and approached 11-year peaks as the short-end of the curve fell following aggressive rate cuts while medium-end spiked.
Aggressive rate cuts by the central bank to stimulate growth has failed to cheer bond investors even as fresh data showed factory output contracted in January and inflation dived to near seven-year lows.