Mumbai: Indian federal bonds gave up early gains for a second straight session on Tuesday, 14 August, as traders closed open postions ahead of a market holiday on Wednesday and bond auctions later in the week.
“Traders do not want to carry risks over a holiday, when global markets are open,” a trader at a primary dealer said.
The 10-year government yield ended at 7.98%, level with its close on both Monday and Friday but up from the day’s low of 7.96%. “Cash has tightened this week and investors do not want to take chances with fresh supplies lined up for this week,” a state-run bank trader said.
The Reserve Bank of India is auctioning Rs40 billion (Rs4,000 crore, $985 million) of treasury bills on Tuesday. On Thursday, it will auction another Rs40 billion of bonds and eight Indian states will sell 10-year loans for Rs33.34 billion.
The Reserve Bank of India sells MSS bonds to help drain cash added to the banking system by its currency intervention to check the rupee’s rise.
While the prospect on increased bond supplies has weighted on yields, analysts said the easing of inflation from an annual rate of 6.7% in January to under 4.5% in July was supportive.
Indian federal bond yields backed further away from one-month peaks on Tuesday, 14 August, tracking softer US Treasury yields, but fresh supplies of paper totalling $2.8 billion in the pipeline checked a sharp decline.
At 9:22am (0352 GMT), the 10-year yield was at 7.97%, a notch lower than 7.98% on Monday and down from 8% last week — its highest in more than a month. Markets are closed on Wednesday due to Independence Day.
“It has been very ranged trading in a holiday-shortened week. The auctions this week are unlikely to squeeze liquidity much,” said Manoj Swain, head of trading at Standard Chartered Bank.
Analysts said the near-term outlook for bonds look bright as a recent spate of monetary tightening has had a slowing effect on inflation from more than 6% in January to 4.5% in late July.
The central bank raised banks’ cash reserve requirements four times since December and has increased a key lending rate five times between June 2006 and March 2007.
“The past rate hikes were quite effective in capping the fast growing liquidity and credit, which should be able to alleviate inflationary pressures stemming from continued capital inflows,” Eric Tsang at Calyon Bank said in a note.