Mumbai: The 10-year bond fell for a third day on Monday, pushing yields to the highest level in 17 months, on speculation accelerating inflation will spur investors to cut their holdings of fixed-income assets.
Yields rose past 8% for the first time since October 2008 as investors grew wary that the Union government’s record Rs4.57 trillion borrowing in the year beginning 1 April will damp demand.
Food prices rose 17.87% in the week ended 20 February, following a 17.58% gain the previous week, commerce ministry data on 4 March showed.
“It was just a question of time before investors came to terms with the huge borrowing programme and the continued rise in prices,” said Anoop Verma, a fixed-income trader at Development Credit Bank in Mumbai. “Yields will have an upward bias in the weeks to come,” he added.
The yield on the 6.35% note due January 2020 jumped three basis points to 8% at close in Mumbai, according to the central bank’s trading system. One basis point is one-hundredth of a percentage point.
The price dropped 23 paise per Rs100 face amount to 88.89. It touched 8.02% earlier, the highest since October 2008.
Verma predicts the central bank will raise its reverse repo rate, at which it absorbs cash from the banking system, between 25 basis points and 50 bps at its policy meeting on 20 April.
The 10-year yield may touch 8.40% in three months, he said.
The reverse repo rate has remained unchanged at a record low of 3.25% since April.
The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased. The rate, a fixed payment made to receive floating rates, rose to 7.06% from 7.05% on 5 March.