Indian bond yields up

Indian federal bond yields ended higher for the fifth straight session on Friday on market fatigue due to a continuous flow of bond sales and also as risk aversion took a backseat globally, with immediate concerns on Greek debt default receding. The 10-year Indian benchmark bond yield ended up 2 basis points (bps) at 8.35 percent after rising as high as 8.37 percent.
The yield has risen 11 basis points this week and 35 bps in the June quarter, its biggest quarterly rise since the December quarter of 2009. Volumes were a moderate 68.90 billion rupees ($1.5 billion) on the central bank's trading platform. The benchmark five-year swap rate ended up rose 5 bps at 7.81 percent, while the one-year rate ended up 1 bp at 8.06 percent. "Domestic factors will weigh on the market and with a continuous flow of bond sales, the 10-year yield could rise to 8.50-8.55 percent but buying by banks would support prices with credit offtake being slow," Jayesh Mehta, managing director & country treasurer at Bank of America-Merrill Lynch.
While finance ministry officials have made repeated statements that New Delhi intends to stick to its fiscal deficit aim of 4.6 percent of GDP in the year that started in April, most private economists expect it to overshoot, which may force it to borrow more to fund the shortfall. The government sold 150 billion rupees of bonds earlier in the day. It has already sold 1.35 trillion rupees of bonds in the current financial year that started in April and will sell another 1.15 trillion by end September.
Concerns on inflation still persist despite the central bank raising rates 10 times in just over a year and analysts see another 50 basis points increase in 2011. "I expect the short-end OIS to rise more as it is currently pricing in only a 25 basis point rate hike," said a senior trader at a foreign bank.
Indian fuel inflation hit an eight-week high in mid-June, showing price pressures persisted even before the government's recent increase in diesel prices and suggesting headline inflation in Asia's third-largest economy is headed back towards double-digits even as growth slows. Traders, however, said a moderation in global commodity prices could temper domestic inflation.