MUMBAI: India's federal bond yields rose on Tuesday, ending a three-day rally in debt prices, after the government announced plans to introduce a new 10-year paper at an auction this week.
The introduction of new 10-year debt had been widely anticipated as outstanding amounts for the existing 8.79 percent 2021 benchmark had reached 830 billion rupees, beyond the 600-700 billion rupees outstanding usually seen in any paper.
Though traders are bound to sell some of their existing debt to buy up the new debt at India's sale on Friday, traders said bond prices will remain supported by rising expectations of an interest rate cut this month.
Hopes for easier monetary policy had sparked a rally in Indian debt markets, and sent near-term 1-year swap rates to their lowest since mid-September on Monday.
"I don't see the yield on the 10-year paper going beyond 8.40 percent. The market is expecting at least a 25 basis points rate cut. If the new paper was not issued, the yield would have moved to 8.30 percent," said Harish Agarwal, dealer with First Rand Bank in Mumbai.
Agarwal expects the coupon on the new 10-year paper to come in between 8.25-8.30 percent.
The yield for the current 10-year benchmark rose as much as 4 basis points to 8.38 percent, and was last trading up 2 basis points at 8.36 percent.
India will sell 150 billion rupees ($2.7 billion) of debt on Friday, including 70 billion rupees of a new 10-year bond, the Reserve Bank of India said in a statement on Monday.
Though the RBI has not announced it, traders also expect new debt to replace the existing 9.15 percent 2024 paper which has an outstanding of 780 billion rupees. Its yield rose 3 basis points on the paper.
Still, bond investors are looking ahead at the RBI policy meeting on June 18, with wholesale price inflation d ata due out next week likely to be key in adjusting expectations.
The one-year OIS rate rose 2 basis points to 7.64 percent, after slumping on Monday to an 8-1/2-month low of 7.60 percent, which has marked a drop of about 40 basis points in a little under two weeks. The five-year rate was up 1 basis point to 7.27 percent.
The RBI's deputy governor Subir Gokarn said on Monday falling crude oil prices and the recently weak GDP data for the January-March quarter gave more room for the central bank to adjust rates.
The central bank cut the repo rate by 50 basis points in April, its first interest rate cut in three years, but had previously signalled reluctance to ease further via the country's key lending rate given its concerns about inflationary pressures.
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