MUMBAI: Indian government bonds ticked up on Tuesday on short-covering tied to suspected central bank buying, but gains were capped as demand-supply concerns tempered sentiment ahead of Friday’s new 10-year issuance.
The yield on the benchmark 10-year note settled at 6.5279%. It ended Monday at 6.5343%.
The rally sustained at the long end, pulling the 6.68% 2040 yield down 3 bps to 6.8704%.
Bond yields fall when prices rise.
The 10-year yield fell below key level of 6.52% intraday on suspected central bank buying, but failed to sustain at those levels, which fanned worries in a market which is already short of buyers.
Focus is now on the auction of the new 10-year bond, which would be key to gauge demand.
New Delhi is set to sell 10-year 6.48% 2035 bond worth 320 billion rupees on Friday, its second auction, and take the outstanding issuance to 640 billion rupees.
Bond yields had dropped last Friday after the Reserve Bank of India did not accept any bids for the sale of 110 billion rupees worth of seven-year bonds.
“Cancellation of a bond sale on Friday is perceived as a sign of the central bank’s discomfort with high yields,” DBS bank said.
“We see room for a modest pullback in long-end yields by end of the fiscal year, while the short-end takes direction from RBI’s policy guidance.”
Strengthening rupee also supported bonds during the day, after it logged its best opening level in about three weeks.
The local currency closed stronger on Tuesday, hoisted by likely market intervention by the RBI even as routine dollar bids from importers and foreign banks kept a lid on the currency’s gains.
The rupee closed at 88.6550 against the U.S. dollar, up 0.1% on the day.
RATES
India’s overnight index swap rates (OIS) ended higher amid paying pressure ahead of Friday’s debt sale.
The one-year OIS rate inched up to 5.48% and the two-year rate rose 1.25 bps to 5.4425%. The five-year swap rate closed nearly 2 bps up at 5.6975%.
American Dollar Exchange Rate