Indian bond yields inch up

Indian federal bond yields nudged up on Friday as investors took profits from the previous day's rally in prices, with some position trimming also seen ahead of the weekend. The 10-year benchmark bond yield closed up 3 basis points (bps) at 8.27 percent, after shedding 6 bps on Thursday. It traded in a 8.23-8.28 percent range intra-day.
Traders said they also sold some bonds purchased at the auction on Friday, as they preferred to stay light ahead of the weekend and amid lingering eurozone debt worries. The government sold 120 billion rupees ($2.7 billion) worth of debt at mostly in-line cut-off yields.
The total volume on the central bank's electronic trading platform was a tad lower at 89.05 billion rupees, compared with the usual 90 billion-100 billion rupees dealt on a normal day. "There was some profit booking and position cutting ahead of the weekend in late trade, which pushed yields up," said Chetan Shenoy, an associate vice president at IndusInd Bank.
"I expect the 10-year bond yield to hold in a 8.20-8.30 percent band next week. Most people expect the central bank to pause after another rate increase, so sentiment is likely to remain bullish." Yields had fallen on Thursday on expectations the central bank may soon pause its rate tightening cycle amid slowing economic growth. The Reserve Bank of India will next review its policy on July 26.
Earlier this week, government data showed industrial output rose at its weakest pace in nine months in May. However, inflation quickened in June, driven by higher prices of manufactured goods and fuel. The benchmark five-year swap rate closed up 4 bps at 8.51 percent while the one-year rate rose 3 bps to 8.90 percent. Both had dropped 12 bps each on Thursday.
Traders said higher US yields also weighed on sentiment, but the euro zone bank stress tests were eyed for further cues. A health check of European banks is expected to show that as many as 15 lenders need more capital to withstand a prolonged recession, with criticism growing that the tests do not encompass the impact of a Greek default. The 10-year benchmark US note was at 2.96 percent when the local bond market closed, up 1 bp from late New York trade on Thursday. "Broadly, market is bullish. Some people do not even expect a hike on July 26, so yields likely to continue to trend a downward bias," a senior dealer with a foreign bank said.