Indian bond yields rise

Indian federal bond yields closed higher on Friday as investors shifted positions to the new 10-year bond, touted to be the next benchmark, and cut their holdings ahead of a holiday-shortened week. The 7.80 percent 2021 bond, the current benchmark bond, closed at 8.97 percent, up 7 basis points from Thursday's close. It moved in a band of 8.92 percent to 8.97 percent during the session. On the week, the yield rose 13 bps.
Total volumes on the central bank's electronic trading platform were low at 68.55 billion rupees ($1.4 billion) compared to 90-100 billion rupees dealt on an average day. Indian financial markets will be closed on Monday and Thursday for religious holidays. "It is a standard thing that people will move out of earlier papers and shift to the new 10-year bond. The market is already considering it the benchmark bond," said Manish Wadhawan, director and head of rates trading at HSBC India. "There will continue to be good demand for the new 10-year bond going ahead but the broad upward pressure on yields will continue due to the supply concerns and high inflation," he added.
India's food inflation accelerated to a nine-month high in late October, driven mainly by costlier protein items, weekly data on Thursday showed. Headline inflation in September barely budged, staying above 9 percent for the 10th straight month. Traders said they expect inflation to stay high until December but the base effect should start reflecting in the headline numbers after that and help bring down the figure closer to 8 percent.
The benchmark five-year OIS rate closed up 4 bps at 7.41 percent, while the one-year rate ended 3 bps higher at 8.22 percent. "The OIS curve was expected return to normal after the central bank suggested the pause in rates. However, it has not happened. Unless liquidity pressures ease significantly or the central bank actually cuts rates, which is not likely for the next six months, the curve will stay like this," Wadhawan said.
The OIS curve has been inverted since late May with the negative spread between the five-year and one-year rate standing at 81 bps, from 80 bps on Thursday. Traders said higher global crude oil prices also weighed on sentiment especially a day after domestic state-run fuel firms raised gasoline prices.
Brent crude extended gains for a second day on Friday to above $111 a barrel as Greece dropped plans to hold a referendum on a European Union bailout, easing worries of a disorderly default. India's state-run fuel retailers raised gasoline prices by about 2.7 percent from Friday, a move that will help them cut revenue losses but adds pressure to stubbornly high inflation in Asia's third-largest economy. "The fuel price hike should not have much impact on the inflation expectations, so broadly people are still expecting inflation to start coming down from December and the central bank to stay on hold," a senior dealer with a foreign bank said.