Gilt auction spurs bonds

The 10-year bonds rose the most since January 31 after demand at a government debt auction last week increased as overnight loan rates stayed near the lowest in more than a year.

Investors submitted bids for almost three times the amount on offer at the sale of 10-year bonds on March 9, compared with less than twice at a previous auction of seven-year bonds a month earlier, according to data provided by the central bank.

The debt securities also climbed after the central bank said sales this week to drain surplus cash will be a third of last week's.

"The demand at the auction was better than expected, and the prices at which they were bid were also better,'' said Sanjeet Singh, a bond trader at ICICI Securities, a primary dealer that underwrites government debt sales in Mumbai. "The liquidity available now is positive'' for bonds.

The yield on the benchmark 8.07 per cent bond due 2017 fell 8 basis points, or 0.08 percentage, to 7.94 per cent at the 5:30 pm close of trading in Mumbai, according to data compiled by Bloomberg. The price of the security rose 0.54, or 54 paise, to Rs 100.84.

The government sold the 10-year bond at a cut-off price of Rs 100.05 apiece. Ten traders surveyed last week before the auction expected the bonds to be sold at a median of Rs 99.93. The central bank will sell Rs 2,000 crore ($452 million) of bonds on March 14 to remove excess funds, compared with Rs 6,000 crore last week.

The interest rate charged by lenders in the overnight money market today fell to as low as 5.05 per cent, near the least since November 2005, Bloomberg data show. A lower rate makes it cheaper for investors to buy debt with borrowed money. Bond gains were tempered by concern surplus cash in the banking system will dwindle after companies this week pay as much as Rs 40,000 crore rupees ($9 billion) in advance taxes.

The cash outflow raised concern the overnight loan rate will increase, reducing demand.

The Central government may announce in the third week of March its borrowing schedule for the financial year beginning April 1. India plans to borrow Rs 1.55 trillion, compared with Rs 1.46 trillion in the current year.

"There isn't much joy from the bond market for us at the moment,'' said Tarini Vaidya, treasurer at Centurion Bank of Punjab in Mumbai. "The fresh supply will keep any positive sentiment in check.''

The yield on the benchmark 10-year bond may range between 7.90 per cent and 8.05 per cent in the next two months, she said.

Bonds were little changed after a report today showed January output at factories, utilities and mines expanded 10.9 per cent, faster than the median 10.1 per cent expected by 14 economists in a Bloomberg survey.

"There's no evidence of further acceleration in gross domestic product in the fourth quarter,'' said S P Prabhu, head of trading at IDBI Capital Market Services, another Mumbai-based primary dealer. "The Reserve Bank will allow the past measures to play out, and won't take precipitate action.''

The spread between the 10-year and 30-year bond, now at 32 basis points, may narrow in coming weeks on expectations the central bank won't raise interest rates any time soon, he said.

The gap between the two yields was 22 basis points on February 14, and narrowed by 6 basis points today, Bloomberg data show.

"The curve, which has slightly steepened in the past few weeks, will flatten.''