MUMBAI: Indian bonds fell for the third session in four on Monday, sending the 10-year yield to its highest level in three weeks, as investors start to grow cautious about the incoming government's fiscal policies.
The fall in bonds contrasts with the rally in the rupee to 11-month highs and a surge in stocks to record levels that greeted the election sweep by the Bharatiya Janata Party led by Narendra Modi on Friday.
For bond investors, the BJP's fiscal policies will be key, especially the first budget, expected to be unveiled by mid-July.
Analysts say the budget may have to include much higher borrowing given that the earlier Congress-led government's fiscal assumptions had largely been seen by markets as unrealistic.
"With the election behind us, we have already seen some reversal in the 10-year bond prices. With no rate increase on the cards in the near term, supply is the only concern going forward," said Bekxy Kuriakose, head of fixed income at Principal PNB Asset Management.
The benchmark 10-year bond yield closed up 3 basis points at 8.86 percent. The yield rose as high as 8.88 percent, its highest level since April 28.
Traders cited little impact after Moody's Investors Service called the resounding victory by the BJP a "credit positive" given it raises the prospect of a stable government that can address India's economic challenges.
Besides the budget, bond investors are also tracking inflationary trends. Although the Reserve Bank of India is widely expected to keep interest rates on hold at its policy review on July 3, the El Nino weather trend is raising concerns of less rains during the monsoon season.
The details of this week's 160 billion rupee bond sale due to be announced later in the evening will be watched for opening cues on Tuesday.
India's benchmark five-year overnight swaps ended steady at 8.27 percent, while the one-year rate closed 3 basis points lower at 8.48 percent.
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