India 10-year bond yield hits 37-month high; seen rising further

MUMBAI: India's benchmark 10-year bond yield rose to its highest level in more than 37 months on Monday as demand for riskier assets increased after European leaders pledged to unveil a plan to solve the zone's two-year-old sovereign debt crisis.

10-year benchmark bond yield was at 8.71 percent, after hitting 8.73 percent, its highest since Aug. 28, 2008 and up 14 basis points from its previous close on Wednesday.

The market was closed on Thursday for a local holiday, while trading in the 10-year paper was shut on Friday for coupon payments.

Total volumes on the central bank's electronic trading platform were at a moderate 33.9 billion rupees ($690 million).

"The 10-year bond yield has reached nearly 8.75 percent. The direction is surely higher, slowly and gradually. There is no target as such now, but no one seems to want to buy government bonds," the head of trading at a private bank said.

The leaders of Germany and France have promised to unveil new measures to solve the euro zone's debt crisis by the end of the month, as international pressure builds for bold steps from Europe to avert an economic backlash of global proportions.

The most-traded 8.08 percent 2022 bond yield had risen 10 basis points on Friday after the first trance of bond auctions in the second half of the fiscal year got partially devolved on primary dealers.

Traders said the market was expecting the Reserve Bank of India to conduct open market operations (OMOs) to help tide over the heavy pipeline of supplies.

India's central bank will have to signal an end to its rate hiking cycle and buy federal bonds to cap yields after a sharp rise in the government's slated fiscal second half borrowing.

"We think supply concerns will likely dominate until the market is convinced that the RBI needs to inject medium term liquidity via OMOs. We will look for cues on RBI OMOs to re-initiate a long G-secs recommendation," Kumar Rachapudi, a fixed income strategist at Barclays Capital wrote in a note.

The benchmark five-year overnight indexed swap rate was at 7.35 percent, up 8 basis points from previous close while the one-year OIS rate was up 4 bps at 7.98 percent.

"We expect the call rate to move closer to the repo rate this week, as last week's auctions drained 150 billion rupees from the banking system. While we continue to be biased to receive 3 year rates, we think that there are near-term risks of the curve moving higher and steeper as risk appetite improves," Barclay's Rachapudi wrote.

The overnight cash rate was at 8.25/8.30 percent, up from 8.20/8.25 percent at Friday's close. The three-year OIS rate was at 7.42 percent, from 7.35 percent at previous close.

Traders would now await details of this week's 150-billion-rupee bond sale, due after market hours, for cues.

Copyright Reuters, 2011