Indian federal bond yields on Monday inched lower on debt buying by traders encouraged by the government's slightly lower-than-forecast supply in the first half of the next fiscal year staring in April. The government said on Friday it would borrow 2.5 trillion rupees ($55.8 billion), or 60 percent of its 2011/12 year borrowing target of 4.17 trillion rupees, by end-September, slightly below market expectations.
The market had been expecting the first-half borrowing to be between 2.65 trillion-2.7 trillion rupees. At 11:05 am (0535 GMT), the most-traded 8.13 percent 2022 bond and the second most-traded 8.08 percent, 2022 bond were both down 1 basis point each at 8.01 and 8.02 percent respectively.
The less liquid 10-year benchmark bond yield also eased 1 basis point to 7.98 percent. Volumes in the bond market were moderate at 26.5 billion rupees on the central bank's electronic trading platform. "The market is likely to continue to trade with a bullish bias, I don't see otherwise going into April. It's a good calendar and the market doesn't have much stock," a senior dealer with a private bank said.
"As of now, even in swaps, all upticks will be received. We will see a change possibly post mid-April, as inflation data would be released then and a 25-basis-points hike in May would be expected." The central bank will announce its annual monetary policy for FY12 on May 3.
Traders expect liquidity to ease slightly in coming weeks as the outflows towards the advance taxes which took place in mid-March, return to the banking system via government spending. Traders said they expect higher US yields to limit any sharp fall in yields.
US Treasuries sold off on Friday after hawkish remarks by a Federal Reserve policymaker drove the 10-year yield above a key support level, signalling that a bearish move that began last week will continue. The 10-year benchmark US notes were trading at 3.46 percent in early Asian trade on Monday, compared with 3.45 percent late in New York trade on Friday.
"I expect the most-traded bond to hold in a 7.95 to 8.05 percent band, with the bullishness continuing," said Chetan Shenoy, an associate vice president, fixed income at IndusInd Bank. Global crude prices would also be watched for gauging its implications on domestic inflation, dealers said.
Oil was steady on Monday with Brent stabilising near $116 a barrel as investors looked to geopolitical factors to maintain near-record long speculative positions, while flaring unrest over the weekend was limited to minor crude exporters Syria and Yemen. Traders broadly expect the entire swaps curve to shift downwards as lower supplies help lower rates across tenors.
The benchmark 5-year swap rate and the one-year swap rate both eased 2 basis points each to 7.95 percent and 7.43 percent, respectively. Traders said the reassurance that the central bank would conduct open market operations if required was also helping market sentiment. A deputy governor at the central bank, Shyamala Gopinath, on Friday said the Reserve Bank of India could purchase bonds from the secondary market if needed to infuse liquidity into the banking system.