Indian bond yields largely steady in 2010

Indian federal bond yields ended largely steady in thin year-end trade on Friday but dealers expected yields to surge in 2011 on stronger growth expectations and inflation worries. The most-traded 8.08 percent 2022 bond ended steady at 8.05 percent and the less liquid benchmark 10-year bond yield was also flat at 7.91 percent.
Volumes were a paltry 16.5 billion rupees ($369 million) on the central bank's trading platform, on lower participation due to year ending. The benchmark 10-year bond yield is up 23 basis points this year. It is down 31 basis points from a 26-month high of 8.22 percent touched in early December.
The benchmark 10-year bond yield rose by 243 basis points in 2009. A strong growth and inflation outlook along with rising credit would result in higher bond yields, with the 10 year expected to jump to 8.25 percent by January and to 8.50 percent by April.
Bond yields had eased after the central bank had indicated a pause in rate hikes at the November policy after raising the key lending rate by 150 basis points this year to tame inflation, which is trending downward since breaching double digits earlier this year but still above the central bank's comfort level.
Data on Thursday showed food inflation accelerated to a 10-week high in mid-December, while the fuel index also rose, adding to inflationary worries in Asia's third-largest economy. India's central bank deputy governor K.C. Chakrabarty said on Thursday that inflation was always a concern, and a pause in rate hikes does not mean a halt.
Dealers said they were awaiting fresh cues from the central bank's bond buy announcement as well as the bond sale details for the coming week expected after trading hours on Monday. The central bank has already conducted two open market operations out of the planned four to buy bonds worth 480 billion rupees and it is due to hold two more in the next couple of weeks. Dealers said they were also keeping a close eye on the next fiscal year's government borrowing details as this year's bond supply tapers off.