Bonds at 7-wk high

MARKET ROUND-UP

Indian bonds rose the most in more than seven weeks, the biggest fluctuation in any government debt market today, as investors were drawn by the highest-ever increase in yields since August 2006.

Ten-year yields reached the highest in more than seven months yesterday on concerns that increased borrowing costs in the money market will spur banks to sell debt to raise cash.

Bonds rose for a second day after the U.S. Federal Reserve dropped its bias for higher rates, at a meeting yesterday. Thus added to speculation that the Indian central bank is nearing the end of a 2 1/2-year series of rate increases.

"You may not get yields as high as these a week from now,'' said Rajesh Babu, a trader at state-owned Andhra Bank in Mumbai.

"Also, the Fed has left the rates unchanged and indicated there won't be more increases. Some banks are buying bonds to pledge them at the Reserve Bank's repo counter in exchange for funds that they may lend at higher rates in the money market.''

The yield on the benchmark 8.07 per cent note due January 2017 fell 10 basis points, or 0.1 percentage point, to 7.94 per cent as of the 5:30 p.m. close in Mumbai, according to the central bank's trading system. It had reached 8.1 per cent yesterday. The price rose by 0.63, or 63 paise per 100 rupee face value, to 100.83. This is the biggest gain since Jan. 31.

Indian lenders can take overnight loans from the Reserve Bank of India at a rate of 7.5 per cent by pledging government securities at the monetary authority's daily re-purchase auction.

The central bank said yesterday that such borrowings can be used to fund lending between banks, which are charging each other as much as 18 per cent for overnight loans today, according to data compiled by Bloomberg.

Banks borrowed a record 431 billion rupees ($9.8 billion) at the Reserve Bank's repurchase auction yesterday, up from 350 billion rupees the day before, according to the central bank data.They borrowed 395 billion rupees today.

The Federal Reserve yesterday kept the benchmark U.S. interest rate at 5.25 per cent and unexpectedly abandoned its tilt towards higher borrowing costs. The Federal Open Market Committee's statement omitted a previous reference to ``additional firming'' in favour of the more general ``future policy adjustments.''

Indian bonds pared gains on concerns that investors will demand higher yields when the federal government resumes bond sales in the fiscal year starting April 1. The government completed its bond sale plan for the current fiscal year on March 9.

``The government borrowing program for the next fiscal year is big,'' said Poonam Tandon, chief of fixed income at Securities Trading Corp. of India, a Mumbai-based primary dealer that underwrites debt sales. ``There's room for bonds to decline. The 10-year yield may rise as high as 8.25 per cent.''