MUMBAI: Indian government bonds rose for a second consecutive session to a four-and-a-half-month high on Wednesday as the central bank's dovish policy tone continued to support sentiment although profit-taking and a rise in US yields limited further gains.
The Reserve Bank of India's indication that it would not raise interest rates further as long as inflationary pressures continued to ease has raised hopes the central bank could even cut interest rates as early as this year.
"There is good liquidity in the system, no expectations for any rate hike and possibility of a rate cut later this year which is helping bonds," said Harish Agarwal, a fixed income trader with First Rand Bank.
"Yields are likely to continue trading with a downward bias. We could see the 10-year yield fall another 10-15 basis points in the near-term," he added.
The benchmark 10-year bond yield ended down 1 basis point at 8.59 percent, its lowest since Jan. 21.
Rate-cut expectations were also reflected in the overnight indexed swaps.
The benchmark 5-year swap rate fell as much as 9 bps to 7.85 percent, marking its lowest level since July 16, 2013, while the 1-year rate dropped as much as 8 bps to 8.17 percent, also its lowest since Jan. 21.
The two rates ended at 7.86 percent and 8.21 percent, respectively. Traders say several swap positions held as a hedge against bond holdings are getting unwound as traders are no longer expecting any rate hikes after the policy review.
But broader gains in domestic bonds were capped as US Treasuries yields rose to their highest in three weeks on Tuesday as investors reset bets that yields are likely to climb after they fell to 11-month lows last week.
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