Bonds dip on yield rise fears

Bonds dropped on speculation investors will seek higher yields at a debt sale this week as a reduction of funds in the banking system cuts demand.

The government plans to sell Rs 9,000 crore ($2 billion) of bonds on February 9, as lenders, the biggest buyers of the securities, borrowed from the central bank for the fourth straight week to meet a shortfall in funds. The central bank last week raised the overnight lending rate for the fifth time in a year.

"It isn't clear what the near-term trend will be and that will deter investors from buying bonds,'' said P Venkatesh, chief fixed-income trader at state-owned Corporation Bank in Mumbai. "The undertone is jittery, as there is a view that interest rate increases may not be over yet.''

The yield on the benchmark 8.07 per cent bond due January 2017 rose 2 basis points, or 0.02 per cent, to 7.71 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system. The price fell 0.17, or 17 paise per Rs 100, to 102.43. Bond yields move inversely to prices.

The government will sell Rs 6,000 crore of the 7.37 per cent note due 2014 and Rs 3,000 crore of the 8.33 per cent debt maturing in 2036 as part of its annual borrowing programme, the finance ministry said on February 2.

The central bank's decision last week to leave the reverse-repurchase rate unchanged spurred optimism Governor Yaga Venugopal Reddy is finished raising interest rates, causing bonds to rally on January 31 and February 2.

The central bank also vowed to slow inflation to between 5 per cent and 5.5 per cent "at the earliest'', while continuing to pursue the "medium-term goal" of containing it below 5 per cent.

Wholesale price inflation accelerated to 6.11 per cent in the week ended January 20, near a two-year high, a government report showed last week.