Bond yields steady, swaps up on RBI rate worry

Bond yields steady, swaps up on RBI rate worry

Mumbai: The bond yields ended steady after rangebound trade but swap rates rose on Tuesday as concerns over heavy debt supplies this week and prospects of further policy tightening by the Reserve Bank of India (RBI) at the month-end monetary policy review weighed.

The yield on the benchmark 10-year bond ended steady at Monday’s close of 7.61%. It had risen to 7.65% on Monday, the highest since 25 June.

It traded in a range of 7.59% and 7.63% on Tuesday.

Volumes were a heavy Rs67.10 billion ($1.4 billion) on the central bank’s trading platform.

The one-year swap rate ended up four basis points to 5.68% after climbing to to 5.72% intraday, its highest since 18 November 2008.

“Swap rates moved up after the LAF (liquidity adjustment facility) figures in the morning showed that cash conditions were still pretty tight," said Sreenivasa Raghavan, treasury head at IDBI Gilts in Mumbai.

The central bank pumped in a net Rs567 billion into the banking system on Monday, compared with the average Rs660 billion a day that it lent in the last reporting cycle.

Banks borrowed Rs478.3 billion from the central bank via the repo facility on Tuesday.

Demand for bonds might be strong to replace a bond that is due to mature at month-end, which limits the upside to yields, Raghavan said.

The 11.30%, 2010 bond worth Rs302.35 billion is due for redemption at the end of July.

However, traders were wary of adding aggressive positions ahead of the Rs120 billion bond sale on Friday.

Traders said they were expecting the government to reduce the amount for the scheduled borrowing as it did last week because of tight cash conditions.

The RBI is likely to raise interest rates again in its quarterly review on 27 July, a new survey found, and rates at the end of the year are likely to be higher than forecast before Friday’s rise.

US Treasury prices edged up in Europe on Tuesday following a long-weekend holiday as the market played catch-up to recent gains in other safe-haven assets.

In interest rate futures on the National Stock Exchange, the September contract implied a yield of 8.0470%, while the December contract was not traded.

Dealers said trading would remain cautious on Wednesday also ahead of the bond supply and the movement of US yields and cash conditions will be watched for further direction.