India bonds little changed as supply worries dominate, benchmark breaks trend

MUMBAI: Indian government bonds ended steady on Tuesday, amid worries over excessive supply till next quarter and waning prospects for further rate cuts, while the benchmark bond recovered from its intraday lows on likely central bank purchases.

The benchmark 10-year yield ended at 6.6328%, after closing at 6.6678% on Monday. Earlier in the day, the yield hit 6.6995%, its highest level since March 17. Bond yields rise when prices fall.

Bonds have been on a downtrend since the last few days on uncertainty over supply absorption.

Indian states raised 337.20 billion rupees ($3.76 billion) through the sale of bonds at higher-than-expected cutoff yields. A stark difference in yields of similar tenor papers was also seen as many investors chose to bid at higher yields.

Indian states, state-run firms to test demand with $5.5bn cluster of debt sales

Analysts estimate an aggregate debt supply of around 8.1 trillion rupees between January and March, including 3.1 trillion rupees from New Delhi.

“The rise in supply comes at a time when investor demand remains tentative and banks demand weak. The support from rate cut expectations will not be there as the cycle is likely over. This is also reflected in OIS pricing,” said Gaura Sen Gupta, chief economist at IDFC First Bank.

Traders further said that the central bank’s debt purchase of 1 trillion rupees on the day turned out to be ineffective as it did not lead to replacement demand.

While local demand remains uncertain, selling by foreign investors is further adding to the pressure, with net exits for the month at a towering $1.4 billion.

RATES

India’s overnight index swap rates ended marginally lower after heightened paying interest, which saw the five-year swap rising above 6%.

The one-year OIS rate ended at 5.495%, while the two-year swap rate closed at 5.5775%. The five-year OIS rate settled at 5.955%, after hitting over nine-month high of 6.0150%.