Bonds dropped by the most in more than a month on speculation some investors are cutting their holdings with a view to reinvest the proceeds at higher yields at an auction scheduled this week.
Yields on benchmark notes due 2019 climbed to a two-week high as the government prepared to offer Rs 12,000 crore ($2.4 billion) of bonds. The sale is part of the record Rs 2,41,000 crore India plans to raise in the first half of the fiscal year that started April 1 to help fund stimulus spending.
“Adjustments to portfolios are going to be frequent because we have a consistent supply for a few months and not an equally supportive outlook,” said Sanjay Arya, treasurer at state-owned Bank of Maharashtra in Mumbai. “I am expecting yields to rise.”
The yield on the 6.05 per cent note due February 2019 jumped 15 basis points to 6.37 per cent at the 5:30 pm close in Mumbai, according to the central bank’s trading system. The price declined 1.05 per 100-rupee face amount to 97.67. A basis point is 0.01 percentage point.
Markets in Mumbai, the country’s financial center, were closed on April 30 for elections and on May 1 for a public holiday. The state of West Bengal sold Rs 2,500 crore of 10-year debt On Monday at a maximum yield of 7.1 per cent, according to the central bank. The nation’s Central and state governments are borrowing more as they increase spending to counter the deepest economic slump since 2003.
One-year yields highest in Asia
Asia’s highest inflation-adjusted yields are increasing the appeal of Indian bonds, the region’s best performers last month, as slowing loan growth leaves banks with more cash to buy debt, Barclays said.
One-year bond yields, adjusted for wholesale prices, have climbed to the highest in the region as the inflation rate slid to the lowest level in at least 27 years. The 3.8-per cent real yield offered by India compares with 2.3 per cent in China, 2 per cent in Thailand and 1.7 per cent in Indonesia, according to data compiled by Bloomberg.
“Rising real rates will add some attraction to Indian bonds,” Sailesh K Jha, a senior economist at Barclays Capital in Singapore, said in an interview. “With credit growth unlikely to pick up significantly and most people thinking there still are downside risks to economic growth, bonds may be in demand.”
The one-year real yield has jumped almost five-fold this year as wholesale-price increases slowed to as low as 0.18 per cent from more than 6 per cent in December. The nation’s bonds returned 4.5 per cent in April, the most among the region’s 10 local-currency debt markets, according to indexes compiled by HSBC Holdings.
The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, increased. The rate, a fixed payment made to receive floating rates, climbed to 5.47 per cent from 5.27 per cent on April 29.
