Indian federal bond yields sat tight in low volumes on Thursday as most investors preferred to stay on the sidelines before a long weekend, but traders say some retracement in bond prices and swaps is likely next week. Traders said the absence of a bond sale next week was likely to support sentiment, while swaps could also retrace slightly after having risen sharply since last week's inflation data.
"I think bonds have been beaten quite badly and there is some scope for retracement. Even swaps are likely to come down by around 10-15 basis points, possibly next week itself, because post (central bank monetary) policy, they may rise again," the treasury head at a foreign bank said. The benchmark 5-year swap rate has risen 17 basis points since its close before last Friday's inflation data, while the one-year swap rate has jumped 29 basis points.
Data showed annual inflation accelerated in March to nearly 9 percent, far above forecasts, adding pressure on the central bank to take bolder action. The most-traded 8.08 percent 2022 bond yield closed down 2 basis points at 8.24 percent, while the 10-year 7.80 percent 2021 bond edged up 2 basis points to 8.06 percent on Thursday.
Total volumes on the central bank's electronic trading platform was nearly half the average at 46.65 billion rupees ($1.05 billion). The 10-year bond has risen 12 basis points since before the inflation data last week while the most-traded bond is up around 3 basis points.
"There is no auction scheduled for next week so that was helping in late trade," said Debendra Dash, a trader with Development Credit Bank. "Monetary policy is on May 3, so trading should be rangebound next week as well," Dash added. A three-day weekend ahead and speculation the central bank may raise rates more than expected to douse price pressures has been prompting traders to stay away from taking any large positions in the market.
The benchmark five-year swap rate closed steady at 8.26 percent while the one-year rate rose 3 basis points to 7.80 percent. "There was some buying interest seen in the market following the bond auction getting concluded, plus there is a view that next week will be better for bonds," a dealer with a foreign bank said.
Traders said despite expectations for some uptrend next week, expectations of at least a 25 basis points increase in key rates on May 3 at the central bank's annual monetary policy would keep buying in check. Various banks including Nomura, Deutsche and Standard Chartered have raised expectations for total rate hikes for the remainder of 2011 to around 75-100 basis points from the previous views of 50 basis points, reports this week showed.
Goldman Sachs on Thursday raised its forecast for Indian inflation and rate increases, and predicted that the central bank will lift interest rates by 50 basis points at its May 3 policy review as inflation becomes broad-based.