Inflation pulls down bonds

Bonds had the biggest weekly drop in almost a month after a government report showed inflation accelerated at the fastest pace in two years.

Yields on benchmark 10-year notes reached the highest in almost two weeks as the report showed wholesale prices rose a faster-than-expected 6.58 percent in the week ended January 27 from a year earlier, the quickest since December 2004. The central bank last week raised its overnight lending rate for the fifth time in a year to 7.5 per cent to curb inflation.

"There's no getting away from the fact that bonds are in for bearish times,'' said Suresh Soni, head of debt trading at Deutsche Asset Management. "Inflation is accelerating and the Reserve Bank has a hawkish monetary stance.''

The yield on the benchmark 8.07 per cent note maturing in January 2017 rose 12 basis points, or 0.12 percentage, this week to 7.81 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system. The price, which moves inversely to the yield, fell 0.80, or 80 paise to Rs 101.80.

The 10-year yield may rise as high as 8 per cent by March 31, when the current financial year ends, Mumbai-based Soni said.