Mumbai: The government bonds rose the most in four weeks on speculation that the highest yields in eight months attracted investors to debt.
Banks and securities companies may have increased holdings after the yield on the most-traded note maturing in 2017 climbed for five straight weeks, the longest stretch since June 2006. Bonds also advanced on speculation that funds in the banking system increased due to coupon payments, giving financial companies more money to purchase government securities.
“Yields look very good for buying and there’s plenty of liquidity,” said Baljinder Singh, a fixed-income trader at state-owned Andhra Bank in Mumbai. “Treasury bill redemptions and coupon payments on government bonds are due to bring” about Rs37,000 crore into the system this month.
The yield on the 7.99% note due July 2017 fell 6 basis points to 7.93%, according to the central bank’s trading system. The price rose 37 paise per Rs100 face amount, to Rs100.35. A basis point is one-hundredth of a percentage point.
An increase in the amount of funds lent by financial institutions to the central bank through its daily reverse repurchase auction suggested lenders have more spare cash.
A decline in borrowing rates in the money market also signalled there’s more money at banks. The rate at which banks lend to each other overnight averaged 5% this month, compared with 6.6% in March.
Bond gains were tempered by speculation that debt sales by the government will damp demand for the securities.
The government plans to sell Rs50,000 crore of debt as part of its borrowing programme in April and May, the most in such a period. It also has scheduled additional debt auctions to damp inflation by draining cash from the banking system.
“We expect bond yields to increase further in the coming weeks,” said Namrata Padhye, a fixed-income strategist at IDBI Gilts Ltd, a primary dealer in Mumbai that underwrites such sales. “The central bank is likely to take more action to curb inflation, such as stabilization debt sales and possibly even an increase in the cash reserve ratio. Supply pressures from the government borrowing plan are high too.”
Wholesale prices rose 7% in the week ended 22 March, the most since December 2004, the ministry of commerce and industry said on 4 April. The rate has outpaced the central bank’s March-end estimate of 5% since February.
IDBI forecasts the yield on the benchmark bond will climb to 8.1% in the next few weeks.