MUMBAI: Indian government bonds surged on Tuesday after better-than-expected state auction demand shored up sentiment and sparked short-covering, while some traders also suspected central bank buying in the secondary market.
The benchmark 10-year yield eased nearly 6 basis points to settle at 6.5155% compared with 6.5732% in the previous session. The 10-year yield eased after a three-day rise.
Bond yields rise when prices fall.
Traders covered short positions after strong demand for state debt helped restore confidence in the market.
Investors also suspected that heavy purchases in the last hour of the session could likely be the central bank buying.
Indian states issued 4-year to 30-year bonds worth 313.5 billion rupees ($3.50 billion) earlier in the day, well above the 210-billion-rupee debt sale scheduled earlier.
Traders had feared the supply was too large for the market short on buyers to absorb, but states still ended up raising 297.25 billion rupees.
Bond market sentiment had soured in the last few sessions as traders scaled back rate easing bets after India’s gross domestic product expanded at 8.2% in the July-September quarter – its fastest pace in 18 months.
A divergence between sharp economic growth and a record low retail inflation has raised doubts about an interest rate cut when the Reserve Bank of India announces its policy decision on December 5.
“There is still room for the RBI to cut rates in December, and that expectation likely drove today’s rally,” said Alok Sharma, head of treasury at ICBC.
“Upside in yields seems limited and there should be a 5-10 basis point rally from here.”
RATES
India’s overnight index swap (OIS) rates were flat-to-lower on Tuesday, even as bond yields eased, as traders stood pat before RBI policy outcome.
The one-year OIS was down 1 bp at 5.48%, while the two-year swap was steady at 5.5025%. The five-year rate inched lower to 5.7975%.
American Dollar Exchange Rate