India bonds slump as RBI excludes key 10-year note from liquidity move

MUMBAI: Indian government bonds fell on Monday, as the central bank’s decision to exclude the most liquid 10-year note from its debt purchase plan sparked selling and dragged the whole curve lower, erasing Friday’s dovish-policy boost.

The benchmark 10-year yield ended at 6.5697%. It closed at 6.5166% in the previous session. The yield on the 6.48% 2035 note rose 4 bps to close at 6.5342%.

Bond yields move inversely to prices.

Most sovereign bonds, except the 10-year note, rose on Friday after the Reserve Bank of India cut its key repo rate by 25 basis points and announced multiple measures to shore up banking system liquidity.

Governor Sanjay Malhotra said the RBI will conduct open market bond purchases worth 1 trillion rupees ($11.10 billion)and a $5 billion foreign exchange swap to pump liquidity.

After market hours on Friday, the RBI announced that the first of the two 500-billion-rupee OMOs would be conducted on Thursday for papers maturing from four to 25 years, excluding the most traded and liquid 10-year bonds.

This soured market sentiment and spurred a larger selloff across maturities in the second half of Monday’s session.

“The exclusion of both 10-year bonds from the RBI’s OMOs disappointed the market,” said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.

“The next key level for the benchmark 10-year is 6.60%.”

Some traders also said continued foreign investor outflows also weighed on bonds.

RATES

India’s longer-tenor overnight index swap (OIS) rates surged on Monday amid offshore paying pressure and as bond yields rose.

The one-year OIS rose 4.25 bps to 5.4675% and the two-year swap was up about 10 bps at 5.57%. The five-year OIS rate jumped 12 bps to

5.91%.