MUMBAI: Indian federal bonds yields edged up on Monday as traders trimmed their positions on the back of a small recovery in global markets, while cautiousness surfaced ahead of a meeting on federal borrowing for the second half of this fiscal year.
Government and central bank officials will meet on Thursday to finalise the borrowing plan for the six months beginning October, a finance ministry source with knowledge of the matter said on Monday.
The 10-year benchmark bond yield closed at 8.31 percent, up 1 basis point from Friday, after moving in a narrow 8.28 percent to 8.31 percent band during the day.
Total volumes on the central bank's electronic trading platform were slightly lower at 81.35 billion rupees ($1.6 billion) compared to the normal 90-100 billion rupees dealt on a usual day.
"Market will take cues from the borrowing programme. If it is as per the schedule announced in the budget then a relief rally will be there," said Bekxy Kuriakose, head of fixed income at L&T Investment Management.
"More or less market is fearing some increase in borrowing and if that is confirmed then yields can rise further, in spite of global events," she added.
New Delhi, which set a gross borrowing target of 4.17 trillion rupees ($84.2 billion) for 2011/12, has completed 2.5 trillion rupees between April and September.
Traders, however, expect the government to overshoot its borrowing target as it is unlikely to meet its disinvestment targets in the current global turmoil.
Indian state run explorer Oil and Natural Gas Corp's (ONGC) share sale valued at around $2.5 billion was deferred earlier this month.
"Market is in a mixed mood now, high government borrowing on one side and the global turmoil on the other. Some participants are betting on a pause in tightening in October as well, which is pushing swap rates down," a senior dealer with a foreign bank said.
Economists now expect India's central bank to increase interest rates one more time in 2011, after it raised its repo rate earlier this month for the 12th time in 18 months to battle persistently high inflation, a recent poll showed.
The benchmark five-year swap rate closed at 6.80 percent, up 4 basis points from Friday's close, while the one-year rate dropped 4 basis points to 7.74 percent.
"The borrowing meet will give some direction. If there is no overshooting of the target, or if it is just 200-300 billion rupees higher, then 10-year yield may ease to 8.20 percent," the foreign bank dealer said.
"While if there is more than 400 billion rupees additional borrowing, then it may rise to 8.35-8.40 levels, but there will be buying emerging there".
Traders said a rise in US yields and oil prices in late trade also weighed on bonds.
US Treasury prices fell as stock gained on the back of hopes for moves to strengthen euro zone banks swayed bond investors to book some profits after a strong rally last week.
The 10-year benchmark US bond yield was at 1.85 percent when the local bond market closed, as compared to 1.82 percent in early Asian trade.
Oil bounced back from seven-week lows as hopes rose of stronger action to solve the euro zone crisis and avert wider financial contagion and global recession.
Copyright Reuters, 2011
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