Indian bond yields inch lower on US cues; borrowing eyed

MUMBAI: Indian federal bond yields edged lower on Thursday, taking cues from a sharp fall in their US counterpart after the Federal Reserve said it would tilt its balance sheet by selling shorter-term notes and using those funds to buy longer-dated paper.

10-year benchmark bond yield was at 8.32 percent, down 1 basis point from Wednesday's close. It has traded in a 8.30-8.32 percent band so far in the day.

Total volumes on the central bank's electronic trading platform were at a moderate 35.9 billion rupees ($737 million).

"Domestic factors are not allowing bonds to rally as traders are likely to be cautious ahead of H2 FY12 borrowing calendar," said Srinivas Reddy, senior manager treasury at Andhra Bank in Mumbai.

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

"I expect the 10-year bond to hold in a 8.25-8.35 percent band until the calendar announcement. Till then, global factors will not really prompt a major rally here," Reddy added.

Broadly there were no expectations of any additional borrowing in this year, but the detailed structure of the borrowing calendar would be crucial for direction, traders said.

The benchmark five-year swap rate and the one-year rate were both down 3 basis points each at 6.86 percent and 7.92 percent, respectively.

US Treasuries extended gains in Asia and the yield curve flattened sharply on Thursday after the Federal Reserve unveiled a long-anticipated but slightly bigger-than-expected plan to increase long-term bonds in its portfolio.

In Asian trade, the 10-year US benchmark bond yield fell to fresh 60-year lows of 1.81 percent from 1.87 percent in late New York trade, when it had dropped 8 basis points.

Traders were also watching movements in global crude oil prices for cues on its impact on domestic inflation.

Brent crude slumped more than $1 on Thursday on concerns oil consumption may fall as steps announced by the US Federal Reserve may not be enough to jump-start an economy, which the central bank said was facing significant downside risks.

The weekly food and fuel inflation print due around noon (0630 GMT) will also be closely monitored for further cues on broader inflation and the likely central bank monetary stance.

Economists now expect India's central bank to raise interest rates one more time in 2011 after earlier predicting that last Friday's increase would be the last of the year, a Reuters poll found.

Copyright Reuters, 2011