Indian bonds hit four-week peak

Indian federal bond yields rose to four-week highs on Friday after disappointing bond auction results raised concerns about the strength of demand in a market already nervous about a central bank policy review on October 27. The benchmark 10-year bond yield ended at 7.32 percent, just off the day's high of 7.33 percent which was its highest since September 14.
It had ended at 7.22 percent on Thursday. The yield rose 10 basis points this week. Volumes were 56.45 billion rupees ($1.2 billion) on the central bank's trading platform. At Friday's 100 billion rupee ($2.2 billion) bond auction, primary dealers who underwrote the sale had to buy 7.3 billion rupees of bonds to cover a shortfall in bids.
Banks are hoping for an increase in the amount of bonds they can place in a HTM account free of mark-to-market requirements. An increase, which the central bank has said it is considering, would limit banks' portfolio losses given 10-year yields have risen about 200 basis points in 2009, and should also support demand for the government's record bond issuance in 2009/10.
Also worrying bond traders is the risk of monetary policy being tightened, after the central bank governor said there was broad agreement expansionary settings in India needed to be wound back and following a rate rise in Australia on Tuesday. Finance Minister Pranab Mukherjee said a balanced approach on interest rates was needed to support growth and contain inflation.
Morgan Stanley said in a report on Friday the RBI might raise the cash reserve ratio, the amount of funds banks have to keep on deposit with it, by 50 basis points, at its October 27 review. Morgan Stanley expects the central bank to hike the repo rate by 150 basis points in 2010, with the first rise in January.
Traders said industrial output data will be watched on Monday as it is expected to accelerate to 9.2 percent year-on-year, picking up from a provisional 6.8 percent rise in July's data. In interest rate futures on the National Stock Exchange (NSE), the December contract was implying a yield of 8.02 percent, near Wednesday's close of 8.0119 percent. The benchmark five-year interest rate swap at 6.85/90 percent, up from its previous close of 6.81/86.