Bond yields hit 3-week high on economic optimism

Bond yields hit 3-week high on economic optimism

Mumbai: The federal bond yields rose to their highest in more than three weeks on Tuesday on expectations industrial output data this week would add to the case for an increase in official interest rates.

Traders said a rise in US Treasury yields ahead of auctions this week also had an impact on the market.

The yield on the benchmark Indian 10-year bond ended at 7.70%, after rising to 7.72%, its highest since 15 January. It had ended on Monday at 7.68%. Volumes were a moderate Rs52.4 billion ($1.1 billion) on the central bank’s trading platform.

“Recent data points to the possibility of an inter-meeting rate hike," said a trader at a foreign bank.

On Monday, the government forecast the economy would grow 7.2% in the 2009-10 fiscal year ending on 31 March, picking up from 6.7% the previous year.

Data on Friday is expected to show industrial output rose 12% in December from a year earlier, close to growth of 11.7% in November, a Reuters survey showed. At a policy review last month, the central bank increased banks’ cash reserve requirements but held key interest rates steady.

While stronger growth may lead to interest rate rises, it could also mean lower-than-expected government borrowing needs because of higher tax receipts and lower welfare spending.

The benchmark five-year interest rate swap was at 7.05/08%, steady from Monday’s close of 7.05/09%.

In interest-rate futures on the National Stock Exchange, the March contract implied a yield of 8.1871% and the June contract yielded 8.1636%.