Mumbai: Bond yields fell on Friday taking comfort from bullish auction cut-offs, but the finance minister’s comments that government will keep unwinding economic stimulus checked the falls.
The yield on the 10-year benchmark bond ended at 7.52%, down five basis points from its previous close. The 2020 bond traded in a wide band of 7.59-7.51% during the day. There was a freak trade at 7.67%, dealers said.
Volume was a robust Rs136.55 billion ($2.9 billion), compared with Thursday’s Rs92.7 billion on the central bank’s trading platform.
“The cut-offs were quite good. That is why the rally. Also, liquidity seems to be okay,” said Srinivasa Raghavan, head of treasury, IDBI Gilts.
The benchmark 10-year bond yield rose intraday two basis points to 7.57% in afternoon trade after finance minister Pranab Mukherjee told Reuters that the government will keep unwinding economic stimulus and continue raising interest rates despite uncertainty linked to euro zone’s debt woes.
“The Reuters story gave us an opportunity to sell the auction stock to those who could not get it at the auction,” said a dealer at a private bank.
Just few minutes before the release of the interview with the minister, the 2020 bond yield had fallen by two basis points to 7.55% after the central bank set better-than-expected cut-offs at the 130 billion rupee auction.
The bank set a cut-off of 7.6965% at the 7.02%, 2016 bond, which was lower than a forecast of 7.7007% in a Reuters poll earlier in the day.
The cut-off price for 8.20% 2022 bonds was 7.8965%, lower than the 7.9397% estimate, while on 8.26% 2027 bond, the cut-off was 8.1760%, below the 8.2032% consensus.
On Monday, bond yields are seen falling more, tracking US Treasuries, which in turn are taking cues from the employment data there.
The US treasury yields fell after a government report showed US non-farm payrolls grew at a lower-than-expected 431,000 in May. It was expected to show an addition of 513,000 non-farm jobs to the US economy.
“I expect rally from here. Market has been beaten down heavily. There should be more buying in 8.20 (percent, 2022) bond as its spread is quite wide with the benchmark,” Raghavan said.
The benchmark 2020 bond is seen in the 7.45-7.52% range on Monday, he added.
“Petrol price hike has also been factored in,” Raghavan said.
On Monday, a panel of ministers headed by the finance minister will meet to decide on raising domestic fuel prices. The benchmark five-year interest rate swap ended at 6.58/62% from its previous close of 6.58/61%.
In interest rate futures on the National Stock Exchange, the June contract implied a yield of 8.1902%, while the September contract was not traded.