Gilts gain for second day

Government bonds gained for a second day as yields near the highest in four months spurred investors to increase purchases.

Yields on 10-year debt on January 12 jumped the most since May 2002 after the government proposed scrapping a requirement that lenders invest at least 25 percent of their deposits in government securities.

Bonds also gained today on speculation a 30 per cent decline in oil prices in the past six months will help curb inflation.

"The rise in yields on Friday was a bit overdone, it was a vicious move,'' said Rajiv Anand, who helps oversee $3 billion of assets at Standard Chartered Mutual Fund Ltd in Mumbai. "This gave investors a chance to buy bonds cheaper.''

The yield on the benchmark 8.07 per cent bond due January 2017 fell 3 basis points, or 0.03 percentage point, to 7.76 per cent as of the 5:30 pm close in Mumbai. The price, which moves inversely to the yield, rose as much as 0.22, or 22 paise per 100-rupee face amount, to 102.15.

"The market doesn't expect a cut in banks' bond holdings to happen soon," Standard Chartered's Anand said.

The government said on January 11 that it approved an order that will enable the central bank to set lenders' debt-purchase limit in place of a present law that makes them hold at least 25 per cent of their deposits in securities.

Bonds' gains were limited on concern debt auctions by the federal and state governments this week will sap demand.

The government will sell Rs 4,000 crore ($902.8 million) of treasury bills tomorrow and four states will auction Rs 1,215 crore of notes on January 18. The Asian Development Bank said it was seeking approval to raise $1 billion worth of local-currency bonds in the country.

"You are looking at only negative factors for the bond market and I'd recommend staying away," said D Satyakrishna, a trader at state-owned Andhra Bank in Mumbai. "We'll see yields inching up as we reach the end of the month."

Bonds still gained on optimism lower oil prices will help moderate inflation in India, with energy prices accounting for 14 per cent of the nation's wholesale price index.