Bonds gain on drop in overnight rate

MARKET ROUND-UP

The 10-year government bonds gained on speculation that a decline in money market rates will encourage banks to buy more debt with borrowed funds.

Overnight borrowing rates fell to the lowest since November 2005 today after the central bank capped daily investment by banks in its reverse repurchase auctions at one-eighth of the average amount they spent in a day at such sales last week. The limit, which took effect yesterday, spurred banks with spare cash to lend more in the money market, making borrowing cheaper.

"Banking system liquidity is good and call rates are easy," said Rajesh Babu, a trader at state-owned Andhra Bank in Mumbai. "People are borrowing in the call money market and funding bond positions. The view on bonds is rather bullish."

The yield on the benchmark 8.07 per cent bond due January 2017 fell 1 basis point, or 0.01 percentage point, to 7.96 per cent in Mumbai (3:06 pm), according to data compiled by Bloomberg. The price rose 0.06, or 6 paise per 100 rupee face amount, to 100.76. Bond yields move inversely to prices.

The spread between the yield on the benchmark one-year bill and the 8.33 per cent bond due June 2036 widened by 3 basis points today to 70 basis points.

The Reserve Bank of India on March 2 capped at Rs 3,000 crore ($674 million) the amount of money it will absorb each day from lenders through its reverse repurchase auction.

Banks put an average Rs 23,800 crore a day last week into reverse repurchase sales. he rate banks charge each other on overnight loans was 5.88 per cent today, compared with 6.15 per cent a week ago, according to data compiled by Bloomberg. The rate declined to 5.2 per cent earlier today, the lowest since November 26, 2005.

The gain in bonds was pared on speculation that investors will demand higher yields as debt auctions this week increase the supply of the securities.

The central bank and the government plan to sell a combined Rs 16,500 crore of new debt at bond auctions this week.

"There are some supply-related concerns in the bond market and the sentiment is a bit bearish now," said R V S Sridhar, vice-president of treasury at UTI Bank in Mumbai. "There's supply at both the long end and the short end of the curve," he added.

The Reserve Bank will sell Rs 6,000 crore of two-year debt today to absorb excess cash from the banking system. The federal government will sell Rs 3,500 crore of treasury bills tomorrow and Rs 7,000 crore of bonds on March 9 as part of its annual borrowing programme.

The cost of the country's interest-rate swaps, derivative contracts used to guard against the risk of an increase in rupee-based rates, increased. The five-year swap rate rose 1 basis point to 7.93 per cent.