Indian bond yields up

Indian federal bond yields rose on Friday as the EU leaders' draft rescue package for Greece eased worries of a default and spurred investors to buy riskier assets, while higher crude oil prices also dented sentiment for safe-haven government debt. The 10-year benchmark bond yield closed up 4 basis points (bps) at 8.31 percent after trading in a range of 8.30 to 8.33 percent during the day.
Total volumes on the central bank's electronic trading platform were slightly lower at 85.50 billion rupees ($1.9 billion), compared to the normal 90 billion to 100 billion rupees traded on a normal day. "The global factors were at play in the market today. The eurozone summit has eased worries of any default for now, so government debt may take a beating," a senior dealer with a foreign bank said. The benchmark five-year swap rate closed up 5 bps at 7.57 percent, while the one-year rate rose 4 bps to 7.95 percent.
Euro zone leaders agreed at an emergency summit on Thursday to give their financial rescue fund sweeping new powers to help Greece overcome its debt crisis and prevent market instability from spreading through the region. US Treasury prices fell on Thursday on views that the eurozone draft plan would calm concerns about imminent defaults.
The benchmark 10-year US note was trading at 2.99 percent when the local bond market closed, down 3 basis points from late New York trade on Thursday when it had risen 9 bps. Oil rose to just under $118 on Friday as Europe's latest attempts to resolve the debt crisis and signs of progress on a US deficit reduction deal offset weak economic data from the world's second-largest oil consumer, China.
Traders will now await the central bank's policy review next week for further cues. "A 25 bps hike is expected by the market along with non- hawkish comments so some bond market rally is possible," said Sandeep Bagla, senior vice president with ICICI Securities Primary Dealership. "If comments are indicative of a pause, then a 5-10 bps downside to bond yields is easily possible," he added.
The Reserve Bank of India (RBI) is expected to raise its key policy rate by 25 basis points on Tuesday after inflation quickened in June and may hike once more by the end of the year, before pausing its long tightening campaign, a poll of economists by Reuters showed. "With inflation still at elevated levels, our baseline view remains that the RBI will stay focused on reining in inflation and is unlikely to indicate the peak of the rate-hiking cycle," economists at Standard Chartered Bank wrote in a note.
"So we expect the OIS curve, particularly the 5Y OIS, which had softened significantly due to global risk aversion, to drift higher, resulting in bearish steepening of the curve." The 10-year yield should hold between 8.25 and 8.35 percent until the rate decision, traders said.