Indian bond yields inch lower tracking US peers, oil

MUMBAI: The federal bond yields inched lower on Monday in line with a drop in their US counterparts and tracking lower global crude oil prices.

The yield on the benchmark 10-year paper was at 8.34 percent, down 2 basis points from its close on Friday.

Traders said the yield should be rangebound at 8.30-8.40 percent this week after the central bank raised rates for the 12th time in 18 months on Friday and signalled more was to come, confounding expectations that it was coming to the end of its tightening cycle.

"The quarter percentage point hike was discounted by markets but I think there could be another 25 bps hike in October depending on how inflation number plays out over the next one month," said Kushal Maheshwari, senior manager corporate treasury at Bajaj Corp Ltd.

"The tone of the policy was hawkish no doubt, but it was less stern than before," he added.

Total volume on the central bank's electronic trading platform was low at 12 billion rupees ($252 million), compared with the usual 25-35 billion rupees dealt in the first hour and half. Only two bonds had been traded so far.

The benchmark five-year swap rate was at 6.83 percent, down 6 bps from Friday's close while the one-year rate was down 5 bps at 7.89 percent.

"The Fed meeting would be the crucial thing to watch out for this week. The market is also awaiting the borrowing calendar for the second half of the year and tracking crude price movements," a senior dealer with a private bank said.

Speculation is mounting that the US Federal Reserve will take steps to lengthen the maturity of its debt holdings at a two-day meeting ending on Wednesday, forcing down longer term US interest rates.

US President Barack Obama will release plans later on Monday calling for more than $3 trillion in deficit cuts over 10 years, with about half the savings coming from higher taxes on the wealthy and big corporations.

US Treasuries prices rose on Friday, helped by expectations of a further monetary accommodation at the Fed policy meeting this week.

In Asian trade, the 10-year US benchmark bond yield was at 2.06 percent, up 1 bp from late New York trade on Friday, when it had eased 3 bps.

Brent crude slipped below $112 on Monday on concerns of weakening demand as investors fear policymakers may not be doing enough to stop Greece's sovereign debt problem from turning into a full-blown banking crisis.

India will decide on its borrowing schedule for the second half of the financial year 2011/12 on Oct. 3, a top finance ministry official had said last week.

Copyright Reuters, 2011