MUMBAI: Indian government bonds snapped a two-day slide on Tuesday after a state debt sale attracted strong demand, easing some worries about underlying market appetite.
The benchmark 6.48% 2035 bond yield fell over 3 basis points to 6.7246%. Bond yields move inversely to prices.
Borrowing costs have remained elevated despite steep rate cuts and roughly $100 billion of bond purchases by the central bank, with supply outpacing demand.
A surge in states’ borrowing has pushed up overall supply and raised long bond yields, complicating the transmission of the local central bank’s rate cuts.
New Delhi will borrow a record 17.2 trillion rupees ($189.95 billion) through bonds in the fiscal year starting April 1.
The borrowing calendar for the coming financial year will be key for the market, said Kruti Chheta, fund manager and fixed income analyst, Mirae Asset Investment Managers (India). “There will be value in the longer-tenor if there is shift in supply to shorter-end.”
READ MORE: Indian bonds slip on heavy state debt supply, post-RBI move
Demand for long-term notes has been softening, and yield premiums have risen, with banks tilting toward state debt and insurers and pension funds shifting toward equities, as per the Reserve Bank of India’s December financial stability report.
The weighted-average maturity of outstanding debt and annual issuance of both central and state government debt have also risen, the report said.
On Tuesday, states raised 476.2 billion rupees ($5.26 billion) via bonds at lower-than-expected cut-off yields, which boosted sentiment. The supply was higher than an initial plan and traders had been bracing for tepid demand.
Rates
India’s overnight index swap rates eased on Tuesday, buoyed by improved sentiment after strong demand at state debt sale.
The one-year OIS rate was steady at 5.51%, while the two-year rate dropped 3.5 bps to 5.6550%. The five-year OIS rate was down 5 bps at 6.13%.
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