MUMBAI: Indian federal bond yields jumped on Tuesday as the market prepared for the sale later this week of a new 10-year paper, likely to become the next benchmark.
After the market closed on Monday, the central bank said that the government will sell 40 billion rupees of 7.83 percent 2018 bonds, 60 billion rupees of a new 10-year bond and 30 billion rupees of 8.26 percent 2027 bonds.
Traders said that the announcement of a new 10-year paper would gradually push aside the current benchmark 7.80 percent 2021 bond, which is already getting illiquid due to the high outstanding volume.
10-year benchmark bond yield was trading up 8 basis points at 8.96 percent, after hitting 8.98 percent -- its highest level since Aug. 26, 2008.
Total volume on the central bank's electronic trading platform was at a moderate 34.20 billion rupees ($888 million).
"The selling is being seen because of portfolio reshuffling which will take place in bonds having higher outstanding volume to create room for the new benchmark," said Shakti Satapathy, a fixed income strategist with A. K. Capital in Mumbai.
"Until the auction, selling is expected to continue and at the auction there would be lower cut-off due to higher demand for the new paper. It is likely to be sold around 8.73-8.78 percent levels. However, the growing fiscal worry might restrict the positive rally," he added.
The benchmark five-year swap was down 4 bps at 7.44 percent, while the one-year rate was 2 bps lower at 8.21 percent.
Traders said the expectation of slippages on the fiscal front fanned fears of additional supply from the government.
India's fiscal deficit reached almost 71 percent of its full-year target in the first half of the year, casting doubts over its ability to meet budget goals as federal finances feel the pressure of squeezed revenues and slowing growth.
Traders said a slight rise in the US benchmark yield could also weigh on sentiment. US 10-year Treasuries edged down in Asia on Tuesday, coming under pressure as players took profits on an overnight surge on the back of losses in equities.
The 10-year US benchmark bond yield was at 2.15 percent from 2.12 percent in late New York trade, when it had dropped 20 basis points.
Renewed worries about a slow progress in resolving the euro zone's debt crisis and a firmer dollar dampened investor appetite for risk, sending Asian shares and commodities lower on Tuesday while keeping pressure on the euro.
Copyright Reuters, 2011