India bonds tread water before large state debt sale

MUMBAI: Indian sovereign bonds were flat early on Tuesday as value buying after a two-day selloff was offset by caution ahead of a large state debt auction.

The benchmark 6.48% 2035 bond yield was at 6.7538% at 10:35 a.m. IST after settling at 6.7559% on Monday. Yields eased slightly across maturities.

Traders remained wary as states are set to auction 486.15 billion rupees ($5.36 billion) of bonds later in the day, about 60 billion rupees above schedule and the largest weekly issuance so far this year.

Investors had sold off debt in the last two sessions after the RBI did not announce any fresh liquidity measures in its policy outcome on Friday, while keeping the repo rate unchanged as expected.

“Supply is the main factor right now and 6.80% on the 10-year isn’t far off,” a trader at an asset manager said. “For now, an accrual strategy looks attractive(which includes buying and holding bonds to earn interest income rather than betting on price gains.)”

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Traders said the previous session saw demand for short-tenor government and corporate bonds as liquidity improved, while longer-dated debt remained under pressure from supply concerns.

System liquidity surplus has averaged about 2.4 trillion rupees so far in February, up from 660 billion rupees in January.

Despite a cumulative 125-basis-point rate cut and roughly $100 billion of bond purchases by the Reserve Bank of India, government borrowing costs remain elevated as supply outpaces demand.

The 10-year yield is still near year-ago levels, with traders expecting further upside as record borrowing looms next year and the easing cycle nears its end.

Rates

India’s overnight index swap rates eased on Tuesday, buoyed by high liquidity and lower US Treasury yields.

The one-year OIS rate fell 1.25 bps to 5.5%, while the two-year rate dropped 2 bps to 5.67%. The five-year OIS rate was down about 3 bps at 6.1525%.