MUMBAI: Indian government bond yields edged higher on Friday, tracking a rise in U.S. Treasury yields, while additional long duration supply from a domestic weekly auction added pressure.
New Delhi sold 160 billion rupees ($1.87 billion) each of 15-year and 40-year bonds.
The yield on the benchmark 10-year bond ended at 6.2947%, compared with 6.2875% in the previous session. The five-year 6.75% 2029 bond was at 5.9547%, compared with previous close of 5.9587%.
U.S. Treasury yields rose on Thursday, with the 10-year yield ending at 4.34%, about 15 basis points (bps) above the lowest level hit earlier in the week.
They rose after data showed the U.S. created more jobs than expected in June, supporting the Federal Reserve’s stance of going slow on rate cuts. The odds of a rate cut by the Fed tanked in July.
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The Reserve Bank of India removed 1 trillion rupees through a seven-day variable rate reverse repo (VRRR) auction, which saw overwhelming response from banks due to a jump in surplus.
The VRRR is likely to keep the overnight interbank lending rates between the policy repo rate and the floor of the corridor, traders said, allowing some policy transmission.
Traders said they still expect the elevated liquidity surplus to sustain, which augers well for the five-year bonds, and has expanded the spread with 10-year bond yields to 35 bps.
“I think the RBI is continuously monitoring evolving situation and taking a cautious approach. VRRRs will be announced in a gradual manner based on how the liquidity situation evolves,” said Aditi Gupta, an economist with Bank of Baroda.
Rates
India’s overnight index swap rates showed a two-way reaction, with the shorter end witnessing receiving bias due to liquidity surplus, and the longer-end rising, tracking U.S. Treasury yields.
The one-year OIS rate was at 5.50%, while the two-year OIS rate was at 5.48%. The liquid five-year rose by 3 bps to 5.68%.
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