Mumbai: The 10-year bond yield on Friday hit its highest in three weeks after the new fiscal year’s first federal debt auction showed weak demand for the benchmark security.
The yield on the 10-year bond ended at 8.01%, from its previous close of 7.86%. It jumped to 8.03% soon after the results were announced, a level it touched on 22 March.
The Reserve Bank of India (RBI) sold Rs120 billion ($2.7 billion) and set a cut-off yield of 7.9645% for the 6.35%, 2020 bonds. Primary dealers had to buy Rs4.48 billion of the bond.
A Reuters poll on Friday had forecast a yield of 7.91% for the paper.
“The market considered the view that there will not be further issuance of the 2020 paper,” said Roy Paul, treasury head at Federal Bank.
Traders said excessive cash surplus with banks, as evident from the central bank’s reverse repo auctions through this week, prompted some investors to brace for an RBI policy action even before its scheduled review on 20 April.
The amount banks have been deploying at the central bank’s liquidity adjustment facility, rose to near Rs1.2 billion on Wednesday, its highest in four months.
“There are strong rumours about a possible central bank policy action before the planned date,” Paul said.
Traders also said result of Friday’s auction showed investors see little trading opportunity in the current benchmark paper.
“It is going to become less liquid in the coming days. Activity may shift to a shorter paper like 7.02% 2016 bonds,” said a senior trader at a state-run bank.
Total volume in bonds on the central bank’s reporting platform was a high Rs79.15 billion.
The 10-year benchmark yield traded between 7.86 and 8.03% on Friday.
The yield struck 8.03% mark on March 22, after the central bank had unexpectedly hiked policy rates.
Food prices accelerated for the second straight week in late-March, strengthening expectations for a hike in key policy rates when the central bank reviews its policy on 20 April.
Industrial output data for February, due on Monday, and March inflation data, next Thursday, are also factors that will influence the policy review.
A Reuters poll of economists showed factory output probably rose 16% in February from a year earlier, marginally lower than an annual rise of 16.7% in January.
The benchmark five-year interest rate swap ended at 6.94/98% from Thursday’s closing of 6.92/95%.