Indian bond yields off highs

Indian federal bond yields retraced from the day's highs on Friday as bargain hunting crept in after results of a 130-billion-rupee bond ($2.5 billion) auction, while expectations of more buybacks also gained ground. The yield on the new benchmark 10-year bond closed 3 basis points higher at 8.82 percent, after touching an intra-day high of 8.86 percent.
Total volumes on the central bank's electronic trading platform were marginally lower at 86.40 billion rupees compared to 90-100 billion rupees dealt on an average day. Yields had risen after the finance minister sought parliamentary nod for a net additional spending of 568.5 billion rupees for the fiscal year ending March 2012. "The additional spending numbers will push up the fiscal deficit so the fears of further increase in the government borrowing program weighed on sentiments," a senior dealer with a foreign bank said.
Although underwriters were forced to buy some bonds at the auction, the amount was lesser than market expectations, traders said. Primary dealers had to buy 1.03 billion rupees worth of the 2020 floating rate bonds. "The auction results were bullish as there was only a marginal devolvement leaving no excess stock with primary dealers," said Sandeep Bagla, senior vice president with ICICI Securities Primary Dealership.
"There is a strong possibility of more open market operations next week triggering some buying." On Thursday, the Reserve Bank of India said it bought back 94.35 billion rupees of bonds compared with a target of 100 billion rupees via multiple price auctions. Tight cash conditions and heavy supplies of debt in coming weeks are expected to keep yields ranged with an upward bias, traders said.
Liquidity deficit in the banking system edged below 1 trillion rupees on Friday for the first time in six sessions after the central bank's buyback. Liquidity still remains strained with banks borrowing 987.75 billion rupees, which was nearly double of 495.25 billion borrowed on November 4. "There is not much demand supply mismatch but the pricing of the bonds is the issue owing to high inflation. That is getting better because RBI is buying back bonds and inflation is also not going up," a senior trader with a primary dealership said.
India's food price index rose 9.01 percent, its slowest in nine weeks, and the fuel price index climbed 15.49 percent in the year to November 12, government data showed. The benchmark five-year swap ended up 3 basis points at 7.34 percent from Thursday's close, while the one-year rate closed steady at 8.09 percent.
Traders would continue to watch the euro and regional equity markets for cues on the evolving macro-economic situation. The euro fell to seven-week lows against a buoyant dollar on Friday and was set to weaken further as disagreement on how to tackle the debt crisis drove borrowing costs to new euro-era highs and boosted demand for liquid assets.