Bond yields fall; rally seen short-lived

Bond yields fall; rally seen short-lived

Mumbai: The bond yields fell on Tuesday as traders were optimistic that Friday’s $3.4 billion bond auction may draw a good response as the papers announced for sale are actively traded now.

Yields fell further in late trade after CNBC-TV18 channel reported citing an unnamed finance ministry source that the government may increase the limit for foreign institutional investors (FII) in government debt to $10 billion and in corporate debt to $20 billion.

The yield on the most traded 8.20%, 2022 bond was at 7.88%, down 12 basis points (bps) from Monday’s close.

The yield on the new 10-year bond, the 7.80% bond maturing in 2020, was down 11 basis points at 7.63%. The benchmark 10-year bond yield was at 7.95%, down 10 basis points on the day.

Volumes were a heavy Rs174.90 billion on the central bank’s trading platform.

“Traders were sitting light in anticipation of an aggressive rate hike and there were also concerns on the market appetite for debt because of weekly auctions," said K. Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund.

“But market demand on the contrary is strong and hence there is buying now."

Indian bond traders are revising their interest rate views after recent dovish comments by top policymakers, while Greece’s debt woes are driving hopes of benign global rates and boosting sentiment.

Demand for bonds at weekly auctions is also aggressive. The central bank set the coupon for the new 10-year bond at 7.80%, lower than market estimate of 7.87% at Friday’s auction.

But there are doubts whether the rally would sustain as the government is set to sell Rs150 billion of bonds on Friday.

“The immediate direction for the market would be if there is a demand for bonds at current levels in the auction," Sundaram Paribas’s Ramkumar said.

The central bank is set to auction Rs50 billion each of the 7.02% bonds maturing in 2016 and 8.20% bonds maturing in 2022 on Friday. It will also auction Rs30 billion of the 8.26% 2027 bond and Rs20 billion of the 8.32% 2032 bonds.

Traders are keenly awaiting the March industrial output data and wholesale price inflation for April due next week. These numbers would give a sense of the strength of the economic recovery and price pressures.

In interest-rate futures on the National Stock Exchange, the June contract implied a yield of 8.2342% and the benchmark five-year interest rate swap was at 6.82/85%, from its previous close of 6.81/84%.