Indian federal bond yields and swap rates fell on Friday after the government announced a lower-than-expected borrowing for the first half of the next fiscal year starting April, with traders expecting the rally in bonds to continue in coming weeks.
India on Friday said it would borrow 2.5 trillion rupees ($56 billion), or 60 percent of its full 2011/12 year borrowing target of 4.17 trillion rupees ($93 billion), by end-September, slightly below market expectations.
Dealers had been expecting the number to be around 2.65-2.7 trillion rupees. The most-traded 8.13 percent 2022 bond closed 4 basis points lower at 8.02 percent, while the second most-traded 8.08 percent, 2022 bond fell 5 basis points to 8.03 percent, according to the clearing corporation data.
The less liquid 10-year benchmark bond yield closed at 7.99 percent, versus 8.01 percent on Thursday. "The outlook for bonds is bullish. I see liquidity improving going forward. There is no immediate negative on the cards and if there is no major bond negative news globally, local factors point towards a rally," said Sandeep Bagla, senior vice president at ICICI Securities Primary Dealership in Mumbai.
"The swap curve could reset 10 basis points lower, while government bonds could also move down by 5-10 basis points. 7.90-7.95 percent on the 2022 bond is a distinct possibility," he added. The benchmark 5-year swap rate eased 5 basis points to 7.97 percent, while the one-year swap rate dropped just 1 basis point to 7.45 percent.
Traders said the reassurance that the central bank would conduct open market operations in case it was necessary was also helping market sentiment. Traders expect the bonds rally to continue going ahead as there were likely to be lesser issuances than they had expected. However, a further sharp rise in global oil prices could hurt sentiment. Oil rose on Friday with Brent crude near $116, and analysts saw the risk of another price spike as unrest bubbled across the Middle East and western powers continued a military campaign in Libya.
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