Indian bond yields up

Indian federal bond yields rose and the overnight indexed swap curve inverted on Friday, reflecting expectations of a wider liquidity deficit and more policy tightening, along with doubts over the pace of long-term economic growth.
The yield on the 10-year benchmark bond ended up 7 basis points (bps) at 8.46 percent. India is likely to revise down its growth forecast for the current fiscal year, currently 9 percent, Kaushik Basu, the chief economic adviser to the finance ministry, said earlier on Friday.
The spread between the five-year and one-year OIS turned negative for the first time since October 10, 2008, according to Thomson Reuters Data. The benchmark Indian five-year swap rate ended up 3 basis points at 8.17 percent and the one-year rate closed up 10 basis points at 8.21 percent.
"The view is that the market is worried liquidity and unsure about growth," said Anindya Dasgupta, head of treasury, Barclays Capital in Mumbai. "There are expectations of another 50-75 basis points rate hike in the next six months." Banks borrowed 764.60 billion rupees from the central bank's repo auction on Friday. Traders expect the repo amount to rise to 1 trillion rupees in mid-June when companies make advance tax payments.
Traders expect the 1 year OIS to rise to 8.50 percent and the 5 year at 8.05-8.10 percent levels. Dealers also expected the back end of the curve to remain suppressed by receiving interest from some corporates as they hedge their bond issuances.
Bond yields were seen rising more with continuous flow of debt supplies. The government sold 120 billion rupees of bonds earlier on Friday and the results were in line with market expectations. "The strategy for bonds remains the same. Go short and then cover in the auction," said a trader at a foreign bank. Traders also awaiting the decision on diesel price hikes, which could further pressure inflation and hurt bonds.
A panel of ministers may meet on June 9 to discuss raising prices of diesel, kerosene and cooking gas, an oil ministry official told reporters on Thursday. Traders also kept a close eye on global fuel prices as it threatens to worsen the domestic inflation situation further. Brent crude hovered around $115 a barrel on Friday, paring earlier gains, as a softer dollar tempered demand worries triggered by eurozone debt concerns and weak US economic data.