Mumbai: Bond yields rose to two-month highs on Wednesday as investors dumped debt on uncertainty surrounding future debt supplies given concerns market borrowing will be higher than forecast.
A comment from a Reserve Bank of India (RBI) deputy governor that there was a need to ensure a calibrated exit from accommodative monetary policy also weighed on sentiment.
The 10-year benchmark bond yield ended at 6.79%, its highest level since 9 April and 14 basis points above Tuesday’s close of 6.65%. It is up 9 basis points so far this month and 154 basis points in 2009.
“Traders are not interested in taking positions in longer-dated bonds and unless there is clarity on the borrowing plans, the bond market will continue to be in a nervous mood,” said a senior trader at a state-run bank.
Spreads between 1- and 10-year bonds widened to 279 basis points from 47 basis points at end 2008 as traders moved to the shorter end of the curve.
At an interim budget in February, the government said it would borrow Rs3.6 trillion in the current financial year that began in April, but analysts expect it to overshoot that amount as it looks to spend itself out of a slowdown.
Prime Minister Manmohan Singh said on Tuesday there was room to spend more despite a high fiscal deficit.
“The market will get direction only when the budget is presented and government’s spending plan and how they aim to raise the resources becomes known,” said Sanjay Arya, deputy general manager of treasury at state-run Bank of Maharashtra.
Volume was a normal Rs58.9 billion ($1.25 billion) on the central bank’s electronic trading platform, with the 10-year bond being the most actively traded.
Adding to the market’s worries has been a 25% increase to Rs150 billion in weekly auction sizes for four consecutive weeks.
Traders will now focus on Thursday’s bond auction for a gauge of demand and then industrial output data on Friday for signs of whether the economy is still slowing or started to recover.