MUMBAI: Indian government bonds posted their best weekly performance in three-and-a-half months with the benchmark 10-year bond yield hitting a 16-1/2 month low on Friday on continued optimism about a possible rate cut by the central bank early next year.
The benchmark 10-year bond yield dropped 15 basis points (bps) on the week, its biggest weekly fall since the week ended Aug. 22, when it had fallen 20 bps.
Traders expect sentiment for bonds to remain bullish in the near-term with retail inflation data and the industrial production data due next Friday being the key domestic triggers. The US non-farm payrolls data due later in the evening will provide opening cues for markets next week.
The 140-billion-rupee ($2.26 billion) debt sale earlier in the day was fully subscribed at largely in-line cut-off yields. "I think a rate cut will happen only in March but the sentiment remains very bullish, so we will see the rally continue with some profit-taking in between. 7.85-7.90 percent could be good support now," said Paresh Nayar, head of fixed income and currencies at First Rand Bank. Nayar expects a 7.88-7.98 percent range for next week.
The benchmark 10-year bond yield ended down 3 basis points at 7.94 percent after touching 7.92 percent in intra-day trade, its lowest level since July 15, 2013.
The recent rally in debt has also been fuelled by foreign fund buying.
Foreign funds have bought debt worth $1.16 billion so far in December, taking total inflows in 2014 to $25.6 billion.
The movement in global crude oil prices will also remain a key determinant of bond market direction.
In the overnight indexed swap market, the benchmark 5-year rate ended down 4 basis points at 7.13 percent, while the 1-year rate closed 2 basis points lower at 7.78 percent.
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