India debt switch pinches bond traders, 10-year yield snaps 6-day falling streak

MUMBAI: Indian government bonds fell on Wednesday, after yet another government debt switch announcement, leading market participants to conclude that any more impactful measures to cool yields are unlikely.

The benchmark 6.48% 2035 bond yield ended at 6.6780%, after closing at 6.6600% on Tuesday. Bond yields move inversely to prices.

New Delhi will buy back bonds worth 250 billion rupees ($2.76 billion) maturing in fiscal year 2027 from the market and sell longer-duration papers in a switch operation next Monday.

This comes after the government switched similar maturity papers with the central bank last week for 755 billion rupees, bringing gross borrowing down to 16.45 trillion rupees from 17.20 trillion rupees initially planned in a federal budget for the fiscal year starting April 1.

While such debt switches reduce the size of debt the market must absorb this year, they increase the supply of longer maturity notes in the market, pushing up their yields. Benchmark 10-year yields rose on Wednesday after six straight sessions of declines.

“Government borrowings should keep the long end under pressure in the coming months amid higher central and state government supply. We advise investors to stay in the front end of the yield curve up to 5 years,” Murthy Nagarajan, head of fixed income at Tata Mutual Fund.

Surplus liquidity in the banking system, which the Reserve Bank of India has allowed to persist, has also helped soften the impact of the government’s large gross borrowing plan, particularly in shorter maturity debt.

Rates

India’s overnight index swap (OIS) rates witnessed muted activity and shallow volumes amid a lack of fresh cues on interest rates.

The one-year OIS rate ended at 5.5%, while the two-year rate closed at 5.6150%. The five-year OIS rate settled at 6.04%.