Indian bond yields surge

Indian federal bond yields soared on Friday, as the market turned nervous with the first auction of the government's enhanced October-March borrowing getting devolved, reflecting the lack of appetite for sovereign paper. India sold 150 billion rupees of bonds with the cut-off in two bonds well above market expectations.
The central bank said the 2017 and 2022 bonds were fully sold while the 2027 and 2040 bonds were only partially sold. Primary dealers had to buy 1.93 billion rupees of the 2027 bonds while they had to purchase 7.06 billion rupees of the 2040 paper. "The devolvement clearly shows that people don't want to be holding long end bonds even at higher (yield) levels," said Arun Kumar R., vice-president of India credit at Nomura Services India.
"The market is terribly nervous on the supply. There is expectation of RBI coming and doing an OMO (open market operations), else to stabilise yields will be extremely difficult," he said. The auction was the first tranche of the enhanced borrowing the government announced last week. New Delhi said it will borrow 2.2 trillion rupees between October and March, significantly higher than the budgeted 1.67 trillion rupees.
The most traded 8.08 percent 2022 bond yield jumped up 10 basis points to 8.73 percent from its previous close. It traded in the 8.65 to 8.74 percent band during the session. Volume was light, coming from a local holiday on Thursday, as there were no trades in the 10-year benchmark bond due to a shut period before its coupon payment next week, traders said.
Total volume on the central bank's electronic trading platform was a paltry 33.10 billion rupees ($672.8 million) a third of the average daily volume. "The yields are moving up due to supply and inflation fears. The premium attached due to global crisis has to be removed as things are improving in Europe. The outlook is bearish for bonds as RBI is expected to hike rates again," said Sandeep Bagla, senior vice president with ICICI Securities Primary Dealership.
Bonds prices also sank as stocks rallied, after a four day slide, as eurozone plans to shore up struggling banks eased concerns about Europe's debt crisis and helped revive risk appetite. India's 30-share BSE index rose 2.8 percent after a four-day slide, as eurozone plans to shore up struggling banks eased concerns about Europe's debt crisis and helped revive risk appetite.
Fears the central bank may continue to raise policy rates to tame inflation despite domestic growth worries may also keep yields from slipping lower, traders said. However, market participants are slowing moving towards expecting a pause on the back of the global turmoil. Analysts polled after the central bank's mid-September policy expected the RBI to deliver the last blow in its current tightening cycle which has lasted over 18 months when it reviews policy on October 25. The benchmark five-year overnight indexed swap rate closed at 7.27 percent, up 12 basis points from previous close. It had risen to 7.28 percent earlier in the day, its highest since August 4. The one-year OIS rate ended 6 bps higher at 7.94 percent.