Bonds snaps 3 days' loss

MARKET ROUND-UP

Indian bonds gained, snapping a three-day decline, on optimism that banks will buy debt to meet reserves as their deposits increase.

Ten-year yields dropped from near the highest in more than seven months on speculation that banks, the largest buyers of government debt in India, were taking advantage of an earlier decline in prices to purchase securities. Indian lenders must invest at least 25 per cent of their deposits in government debt or other low-risk securities approved by the central bank, according to the country's banking law.

"Banks' demand for debt to meet reserve requirements should continue to provide support for bonds in the next few weeks as deposits rise,'' said Sanjeet Singh, a bond trader at ICICI Securities, a primary dealer that underwrites government debt sales in Mumbai.

The yield on the benchmark 8.07 per cent note due January 2017 fell 4 basis points, or 0.04 percentage points, to 8.04 per cent as of the close at 5:30 p.m. in Mumbai, according to the central bank's trading system. It had earlier rose to 8.11 per cent.

The price, which moves inversely to the yield, rose 0.25, or 25 paise per 100 rupee face amount, to 100.2.

An accelerated increase in bank deposits is spurring bond purchases. Deposits rose by 25 per cent, or 4.95 trillion rupees, to Rs 24.9 trillion in the 12 months ended March 2, the central bank said on March 16. That beat a 17 per cent gain in the previous year.

Bonds dropped earlier on concerns that higher borrowing costs in the money market will spur banks to sell debt to raise cash.

``The spurt in short-term money market rates won't be good for bonds,'' said M. Natarajan, chief trader at IndusInd Bank in Mumbai. ``Banks may sell bonds to generate cash. There are no positive triggers for bonds in the short term.''

The 10-year bond yield may rise as high as 8.15 per cent in the coming week, Natarajan said.

The rate that banks charge each other for overnight loans rose to the highest in at least nine years on concerns that corporate tax payments have drained lenders' funds, according to bond traders.

Companies may have paid as much as Rs 400 billion ($9.2 billion) in quarterly tax last week, compared with Rs 280 billion estimated to have been paid in the previous quarter, according to a Bloomberg News survey.

The overnight money market rate climbed to 63 per cent today from 17 per cent yesterday, after averaging 7.05 per cent between Jan. 1 and March 16, according to data compiled by Bloomberg.

The shortage of funds has prompted lenders to borrow from the central bank since March 16 through the monetary authority's daily sales of repurchase agreements, to maintain the mandated cash reserves. Banks borrowed Rs 350 billion from the Reserve Bank of India yesterday, up from Rs 198 billion on March 16.