MUMBAI: India's benchmark 10-year bond rose to its highest level in four months on Friday as good demand at a debt sale and expectations that the new government would work towards reining-in the fiscal deficit boosted sentiment.
Yield on the benchmark 10-year fell 19 basis points on the week, its biggest weekly fall since the week to Dec. 13 when it had dropped 25 bps.
Sentiment has improved after two senior finance ministry officials told Reuters on Thursday that India could bring down the fiscal deficit to around 3.8-3.9 percent of GDP, from the current target of 4.1 percent, and that it could also reduce borrowing from markets by 250 billion rupees ($4.25 billion).
"The price is clearly following the euphoria over the new government likely cutting spending and bringing down the deficit," said Anoop Verma, senior vice-president at DCB Bank.
"The auction cut-offs were also very good and further led to the rally. Technically, the 10-year is overbought so buying could shift to the short-end papers leading to a steepening of the yield curve."
The benchmark 10-year bond yield closed 7 basis points lower at 8.64 percent. Earlier, the yield dropped to 8.62 percent, its lowest level since Jan. 23.
Bonds extended gains after the Reserve Bank of India sold 160 billion rupees worth of bonds at yields below market expectations.
Traders are now focusing on who the country's new finance minister would be. Prime minister-designate Narendra Modi is due to be sworn-in on Monday.
In the overnight indexed swap market, the benchmark 5-year swap rate closed down 5 bps at 8.14 percent, while the one-year rate ended 2 bps lower at 8.38 percent.
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