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Business News/ Opinion / Online-views/  Bond prices drop as yields at 1-year low
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Bond prices drop as yields at 1-year low

Bond prices drop as yields at 1-year low

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Indian bonds declined the most in almost six weeks as yields at the lowest in a year damped demand for the securities.

Benchmark bonds ended two days of gains on speculation that investors will push yields higher before scheduled debt sales this week. The yield on the frequently traded note due 2017 fell to the lowest in a year on Monday as a decline in overnight money-market rates encouraged some investors to add to their debt holdings using borrowed funds.

“Investors are capitalizing on the surge in bonds, as such a rally hasn’t happened for quite some time," said S. Srikumar, chief of fixed income at Corporation Bank in Mumbai. “I expect yields to rise a bit further in coming days."

The yield on the 7.49% note due April 2017 rose 1.4 basis points to 7.69% in Mumbai, according to the central bank’s trading system. The price fell 0.09, or 9 paise per Rs100 face amount, to 98.69.

The Reserve Bank of India plans to sell Rs5,000 crore of treasury bills on Wednesday, including Rs4,000 crore of the short-term securities meant to mop up surplus funds from the banking system.

The government also plans to sell Rs10,000 crore of bonds on 11 January as part of its annual borrowing programme.

The decline in bond prices was limited by speculation that government spending will increase in the coming months, boosting cash in the financial system. Ministries may increase spending to meet budget targets before the fiscal year ends 31 March.

“Liquidity is expected to ease in light of government spending," Namrata Padhye, an analyst at Mumbai-based IDBI Gilts Ltd, said in a research note. Yields may decline, “tracking the improved liquidity and softer money market rates".

The overnight borrowing rate in the local money market has averaged 5.5% since 1 January, compared with 7.35% in December.

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Published: 09 Jan 2008, 12:03 AM IST
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