Indian bonds yields ease, supply in focus

MUMBAI: Indian federal bond yields eased on Wednesday, tracking lower US yields, with dealer buying of bonds and paying the 5-year overnight indexed swap (OIS) to cash in on the wide spread between the two also supporting.

However, lined up supplies this week will limit heavy buying, dealers said, even though expectations for a rate pause by the central bank at the Sept. 16 policy are seen broadly supporting a downmove in yields.

The yield on the benchmark 10-year bond yield was at 8.23 percent, down 3 basis points on the day.

Volumes were a moderate 62.20 billion rupees ($1.4 billion) on the central bank's trading platform.

"There was a bond-swap being put in yesterday...the 5-year OIS was getting paid and bonds were being bought, that would continue today," said a senior trader at a primary dealer.

"This trade is mainly betting on their spread of 135 basis points narrowing...either the bonds will rally or swap yields will trade higher."

The one-year rate was down 6 basis points on the day at 7.67 percent. The benchmark five-year overnight indexed swap rate was down 5 basis points at 6.87 percent.

However, some were skeptical about the success of this trade.

"We need a global "risk on" environment for paid 5-year OIS leg to perform, which should be the key determinant of performance of this trade (trade of paying OIS and buying bonds) as OIS is much more volatile than bonds," said Vivek Rajpal, a fixed-income strategist at Nomura.

US 10-year Treasury notes edged higher and the two-year/10-year yield spread narrowed in Asia on Wednesday as US stock index futures retreated, stirring demand for safe-haven government debt.

With the global economy sputtering and volatility prevailing in financial markets, a speech by Federal Reserve Chairman Ben Bernanke on Friday at 1400 GMT in Jackson Hole, Wyoming, at an annual gathering of policymakers and academics, is in focus.

A year ago, at the same event, Bernanke signaled a $600 billion Treasuries purchase programme, known as QE2, aimed to avert deflation and to stimulate investments and spending.

A growing number of analysts predict that Bernanke could introduce a scheme for the Fed to extend the maturity of its Treasuries holdings by buying longer-dated Treasuries. This would narrow the difference between short- and long-term interest rates with the goal to spur lending and asset values.

The domestic market is however, pricing in a rate pause by the Reserve Bank of India on Sept. 16, when the central bank reviews its policy, given the bleak outlook for global growth.

India will sell 100 billion rupees of treasury bills later on Wednesday, ahead of a 110 billion rupees bond auction on Friday. Seven Indian states sold 53.5 billion rupees of state loans on Tuesday.

Copyright Reuters, 2011