Bonds fell for the first time in four days on speculation investors will demand higher yields as government debt sales increase.
Yields on notes maturing in 2018 climbed from a two-week low before a planned sale of Rs 12,000 crore ($2.3 billion) of bonds by India on March 6. The government last month raised its debt-sale target for the financial year ending March 31 by 80 per cent to Rs 2.61 lakh crore to fund additional expenditure aimed at countering an economic slowdown.
“Yields rose today because of concerns about increasing debt supply,” said Baljinder Singh, a fixed-income trader at state-owned Andhra Bank in Mumbai. “People who bought bonds in recent days are selling ahead of the auction later this week.”
The yield on the most-traded 8.24 per cent note due April 2018 rose 9 basis points to 6.38 per cent at the 5:30 p.m. close in Mumbai, according to the central bank’s trading system. The price fell 0.65 per 100 rupee face amount to 112.70.
The benchmark yield has climbed 1.52 percentage points from a record low of 4.85 per cent reached in January. The government will sell Rs 8,000 crore of the 6.05 per cent debt due 2019, and Rs 2,000 crore each of the 8.24 per cent securities maturing in 2027 and 6.83 per cent notes due 2039, according to the finance ministry.
Bonds rose earlier on optimism scheduled debt purchases by the central bank will boost cash in the banking system this week. The Reserve Bank of India plans to buy Rs 6,000 crore of bonds on March 5, with an option to take Rs 3,000 crore more from investors depending on demand.
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India’s interest-rate swap rates will rise faster than bond yields as record government borrowing drains money from the financial system, according to Goldman Sachs. “With bond yields slated to rise, swap rates are expected to rise as well,” Pranjul Bhandari and Tushar Poddar wrote in a note. The spread is far from its “long-term average and swap rates need to start rising rapidly for the spread to return to normal”, they wrote.
The five-year government bond yield is currently 89 basis points above the cost of the similar-maturity swap, a fixed payment made in exchange for a floating one. The gap averaged 23 basis points over the past five years. The cost of five-year swaps increased to 5.03 per cent, from 5.00 per cent yesterday.
Call stays steady
Overnight call money rate stayed around the 4.05 per cent level today, as against the weighted average price of 4.07 per cent yesterday with abundant liquidity in the system.
Call rates moved in the 2.50 per cent to 4.10 per cent range.
“There was ample liquidity for banks to meet the reserve requirement. So, there is no pressure on the rates. There may be some pressure on rates after 10 days or so when the fourth instalment of advance tax payments are made but there will not be a steep rise,” said a treasury executive.
While there were no bids to borrow through the repo route, banks used the reverse repo window under the liquidity adjustment facility to park Rs 60,899 crore with RBI.
The weighted average rate in the collateralised borrowing and lending operations (CBLO) segment was 3.67 per cent, compared with 3.72 per cent yesterday, according to data on the Clearing Corporation of India website.