MUMBAI: Indian government bonds fell for the fourth straight session on Monday, with the benchmark 10-year bond yield hitting a one-month high as escalating tensions in Iraq pushed up crude oil prices and investors fretted over the impact on domestic inflation.
Expectation of monsoon rains staying subdued over the next few weeks dampened sentiment, as it would potentially raise inflationary pressures.
The 10-year bond yield rose as much as 6 basis points on the day to 8.78 percent, its highest level since May 21.
Traders also pruned bond holdings ahead of the new government's budget, scheduled for July 10, which will detail the borrowing plan for 2014/15. The market expects yields to have an upside bias until the budget.
"Global oil prices at $115 a barrel is adding to the uncertainty on inflation and going into the budget, the outlook looks mildly negative from here," said Killol Pandya, a senior fund manager-debt at LIC Nomura Mutual Fund.
Brent crude held near $115 a barrel on Monday, supported by worries about potential disruptions to supply from Iraq where Sunni insurgents took control of strongholds along the border with Syria at the weekend.
"Money has been flowing out of mutual funds and with overnight rates being jerky, it has affected liquid funds," he added.
In June, the overnight cash rate moved in a wide 7 percent to 8.90 percent band mostly due to advance tax outflows. The central bank prefers the call rate to be closer to the repo rate of 8 percent.
Of the 15 sessions in June, mutual funds were net sellers of government debt in nine, Thomson Reuters data showed.
The benchmark 10-year bond yield ended up 5 basis points on the day at 8.77 percent.
In the overnight indexed swap market, the benchmark five-year rate closed up 8 bps at 8.02 percent, while the one-year rate ended 3 bps higher at 8.38 percent.
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