Indian bond yields rise on continuous debt supply

Indian federal bond yields rose on Friday, with market sentiment weak in the face of heavy debt supply lined up, while traders speculated on the bonds to be sold at next week's auction. The yield on the 10-year benchmark bond ended up 3 basis points on the day at 8.35 percent after rising to 8.37 percent intra-day.
The 10-year yield is up 8 basis points this week and 22 basis points so far in May. Volumes were moderate at 57.40 billion rupees ($1.3 billion) on the central bank's trading platform. The benchmark five-year swap rate ended down 2 basis points at 8.20 percent, while the one-year rate ended down 1 basis point at 8.10 percent.
"Overall the trend is for yields to rise and the 10-year yield could rise to 8.50 percent in the near term," said Jayesh Mehta, managing director & country treasurer at Bank of America-Merrill Lynch. The Reserve Bank of India (RBI), which raised interest rates in early May for the ninth time since March 2010, is seen raising rates by another 75 basis points in 2011.
The RBI chief said New Delhi will have a hard time hitting its fiscal deficit target this year unless it makes adjustments to account for the rise in fuel and fertiliser prices, sparking market concern the government will need to step up borrowing in order to fund the gap. New Delhi has said it will borrow a gross 4.17 trillion rupees in the 2011/12 fiscal year, of which it will raise 2.5 trillion rupees in April-September.
The government sold 120 billion rupees of bonds earlier in the day and the results of the sale were in line with market expectations. Traders said they were expecting the government to sell the 10-year bond next week and hence it was under selling pressure.
"There were expectations that the government will sell the 10-year bond in the next auction so the strategy continues to go short going into the auction and cover in the auction," a senior dealer with a foreign bank said. With a heavy debt supply lined up and expectations for more rate increases traders preferred to stay light on bonds. "It is not a good time to buy bonds," said another senior dealer with a foreign bank who did not wish to be named.