Indian federal bond yields tumbled on Friday on bargain hunting and as a sharp fall in global oil prices marginally eased concerns over domestic inflationary pressures, but a likely hike in local fuel prices may prevent a further drop in yields. The 10-year benchmark bond yield ended 9 basis points (bps) lower on the day at 8.17 percent, extending Thursday's fall of 3 bps after surging 15 bps in the previous two sessions.
Intraday, the 2021 bond had moved in a 8.11-8.23 percent range. Traders said India is likely to increase fuel prices next week despite the pullback in global oil prices. Since the risk of high domestic inflation remains, bond yields are not expected to fall much from current levels, they said. The second-most traded 8.13 percent, 2022 bond yield ended at 8.38 percent from 8.45 percent previously.
Overnight indexed swaps (OIS) rates also moved southwards for a second straight session, comforted by the slump in global commodities. The benchmark 5-year rate ended at 8.26 percent, down 9 bps on the day, while the one-year rate fell 5 bps to 8.03 percent from last close.
The fall in bond yields and swap rates was temporary, said Ashish Vaidya, head of trading at UBS Mumbai. "These are blips and will fizzle out." "(Bond) supply is high and the monetary policy is clear-cut hawkish. We could see the 10-year bond in 8.50-8.75 percent range in next two months."
The government raised 120 billion rupees ($2.7 billion) through a bond auction on Friday and is scheduled to sell another 480 billion rupees of debt in the next four weeks. Bond yields did not react to cut-offs set at Friday's auction as they were broadly in-line with estimates, dealers said.
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