Indian federal bond yields came off near two-month highs in late trade on Friday, as investors who had pared positions ahead of a 100-billion-rupee ($2 billion) auction raided the secondary market after the results. The yield on the most actively traded 8.24 percent bond maturing in 2018 ended at 6.17 percent, off an intraday peak of 6.31 percent, a level last seen on December 11, and above Thursday's close of 6.11 percent.
"Yields came off highs after the auction results on short covering as investors who were not allotted bonds started buying them back in the secondary market," said a dealer at a state-run bank. At the close, the 10-year bond had risen 92 basis points this month after falling 254 basis points in 2008. It fell to a record low of 4.86 percent earlier this month after a hefty rate cut by the central bank.
The 7.56 percent 2014 bond, another liquid paper, ended at 5.95 percent, higher than Thursday's close of 5.91 percent. Volumes were heavy at 76.90 billion rupees ($1.6 billion) on the central bank's trading platform. The Reserve Bank of India set a cut-off yield of 7.35 percent at the auction of 6.83 percent bond maturing in 2039, well above market expectations of 7.09 percent.
Dealers said the higher cut-off yield for the longer tenor bond showed a lack of demand from insurance companies and pension funds. Analysts say higher government spending and a revenue shortfall due to an economic slowdown will strain government finances, push up borrowing and keep the pressure on bond yields despite a series of aggressive rate cuts by the central bank.
India's fiscal deficit during April to December jumped to $44.5 billion as the cash-strapped government stepped up spending to stimulate a slowing economy. A senior finance ministry official said on Friday, the government is yet to finalise its extra borrowing for the current fiscal year. Dealers said fresh bond supplies remained the only concern now and if there was no auction next week, yields would ease.