MUMBAI: Indian government bonds dropped for the third straight session to their lowest in 2-1/2 weeks on Friday as continuing violence in Iraq threatened to push up global crude oil prices which could further add to the domestic inflationary pressures.
The absence of foreign funds from the debt market after they exhausted almost all of the investment limits has been a key reason along with the crisis in Iraq for the recent losses in bonds.
The 10-year paper rose as much as 4 basis points on day to 8.73 percent, its highest level since June 3.
Traders expect the market to remain in a tight range ahead of the budget due by mid-July.
"There were hopes FII limits will be automatically increased once they hit 100 percent. That has not happened and it doesn't look like anything is moving in that direction," said Naveen Singh, senior vice president, fixed income at ICICI Securities Primary Dealership.
"Market got stumped on the FII limits and then with higher WPI and the crisis in Iraq, market participation has also gone down significantly. We could see some buying emerge close to the budget but for next week 8.75 percent may hold," he added.
The benchmark 10-year bond yield closed up 3 basis points on the day at 8.72 percent. The 10-year yields rose 12 basis points on the week, its biggest weekly rise since the week to April 4.
Yields have risen in three out of the last four weeks.
Total volumes in the debt market have come down to an average 340 billion rupees ($5.70 billion) over the last six trading sessions, down 200 billion rupees from the preceding sessions in June.
Traders will continue to monitor the moves in global crude oil prices and the rupee for near-term direction.
Oil held near $115 a barrel on Friday, close to a nine-month high, and was headed for its second weekly gain on increased risks of disruption to supply from Iraq.
Dealers said results of the 150-billion-rupee debt sale were largely in line with expectations.
In the overnight indexed swap market, the benchmark five-year rate closed up 5 bps at 7.94 percent while the one-year rate ended 3 bps higher at 8.35 percent.
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