Indian federal bond yields ended up on Friday as rate hike worries and tight liquidity conditions kept investors on the sidelines while the government's $6.4 billion bond buyback plan had muted impact on market sentiment. Dealers said they were wary about adding new positions in the run up to the central bank's November 2 policy review as there were expectations for at least a 25 basis points rate increase.
-- Cash crunch may stay, bond buyback response seen tepid
-- Higher-than-expected auction cut-offs dampens sentiment
-- Rate worry, tight cash to keep swaps, bonds under pressure
"Instead of a buy back, if they had deferred 1 or 2 auctions, that would have been positive, there is also a big state loan auction next week," said Roy Paul, a deputy general manager at Federal Bank in Mumbai. Swaps sustained the day's fall and ended lower after moving in a tight band in the last few trading sessions, dealers said. The Indian government's buyback auction announced late on Thursday may not find too many takers as traders are reluctant to sell the bonds to the government at a loss following the recent jump in yields.
"Given that short-term yields are currently high we believe the response to this buyback announcement will be limited," Barclays Capital said in a note. "Banks in need of cash and with just enough excess SLR securities are likely to find it profitable to borrow from the RBI at 6 percent." The finance ministry said late on Thursday it will buy back bonds worth $2.7 billion through an auction on Monday in the first tranche of the buyback plan.
The most traded 8.13 percent, 2022 bond yield ended up two basis points at 8.10 percent. It moved in a 8.05-8.10 percent band during the day. The less liquid benchmark 10-year bond yield ended up 1 basis point at 8.14 percent. It moved in a 8.10-8.15 percent range.
Dealers have been staying away from the benchmark 10-year bond expecting the paper to be out of issuance in the next few month due to its high outstanding. Total volume traded was 89.60 billion rupees ($2 billion) compared with Thursday's 100.45 billion on central bank's trading platform. The one-year swap ended down 8 basis points at 6.63 percent, after falling to 6.62 percent, lowest in a week.
The benchmark five-year swap ended down 4 basis points at 7.07 percent, after falling to 7.04 percent, lowest since September 29. Dealers were also disappointed with the cut-offs at the $2.5 billion auction. "The cut-off yields came above expectations and so long as cash conditions continue to be tight bonds will be under pressure," said Federal Bank's Roy Paul. The Reserve Bank of India set a cut-off of 8.11 percent on the 8.08 percent, 2022 bonds higher than an expected 8.09 percent, and 8.47 percent on the 8.30 2040 bond, above expected 8.46 percent.
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