Indian bond yields post biggest weekly fall in a year

Indian federal bonds yields posted their biggest weekly decline in a year on Friday as weak economic growth, comments from a finance ministry official and short-covering ahead of the US non-farm payroll data prompted investors to buy debt. Non-farm payroll data is due to released at 1230 GMT on Friday and will provide opening cues to the market next week.
US non-farm payrolls likely increased by 150,000 in May, according to a Reuters poll, less than the 180,000 forecast before a report on Wednesday showed a sharp slowdown in private job growth last month. The Indian 10-year benchmark bond yield ended flat at 8.27 percent after moving in a band of 8.25 to 8.30 percent. The 10-year yield has tumbled 19 basis points (bps) this week, its biggest fall since mid-May 2010, according to Thomson Reuters data.
Total volumes on the central bank's electronic trading platform were a moderate 106.20 billion rupees ($2.4 billion). "The market seems evenly poised for whatever has to happen next week: non-farm payrolls, diesel price hike or whatever else. The policy week would be more crucial," said Manish Wadhawan, director and head of rates trading at HSBC India.
"The market seems to be pricing in the possibility of there being no rate hike on June 16 but I think rate rises are going to be there. I expect 25 basis points hike at the policy with a 15-20 percent chance of a 50 bps but that may not happen."
Appetite for bonds had picked up early this week after a senior finance ministry official said prices had fallen too low and indicated the 10-year yield should ideally be between 8.20-8.30 percent. Weaker-than-expected March quarter economic growth, which suggested the central bank may temper the pace of its tightening, also helped sentiment.
"The trend is clear since the last few days, so unless some negative news comes, this trend will continue. There are no targets as such on the downside," said Anoop Verma, an associate vice president with Development Credit Bank. Traders said they do not expect the liquidity shortfall to cross 1 trillion rupees despite the advance tax payments by corporates around mid-June.
Economists expect the central bank to raise key rates by 25 bps at the review despite the slowdown in growth as inflation concerns still linger, thus keeping pressure on short-term swap rates. The benchmark five-year swap rate closed down 5 bps at 7.86 percent and the one-year rate fell 4 bps to 7.92 percent.
The 5-year OIS has shed 31 bps this week as against 29 bps on the 1-year rate. The 5-year against 1-year OIS spread turned negative last week, inverting the curve. Traders expect the OIS curve to stay negative for the time being. "There is nothing much to read into this inversion really. It is just due to liquidity and market positioning," HSBC's Wadhawan said. Traders expect the OIS inversion trend to possibly start changing after the policy review. They will continue to watch global crude oil price movements for its likely impact on domestic inflation.