Benchmark 10-year Indian bond yield on Friday surged to its highest level in more than three years as supply stockpile deterred investors from adding positions, outweighing positive sentiment triggered by the central bank's rate pause signal. A plan to contain Europe's debt crisis also caused investors globally to spurn safe-haven government debt, adding to the upward pressure on yields.
The 10-year benchmark bond yield closed up 8 basis points (bps) at 8.84 percent, after touching 8.88 percent - a level last seen on August 28, 2008. It traded in a range of 8.82 to 8.88 percent during the session. Markets were closed on Wednesday and Thursday for local holidays.
Total volumes on the central bank's electronic trading platform were lower at 76.70 billion rupees ($1.6 billion) compared with the usual 90-100 billion rupees dealt on a normal day. India's central bank raised interest rates on Tuesday for the 13th and possibly final time in a tightening cycle that began in early 2010, on expectations that persistently high inflation will finally begin to ease starting in December.
"Unless and until either an open market operation or enhancement of foreign institutional limits in government debt is announced, 8.85 to 8.90 percent band will hold on the 10-year paper," Paul said. India may consider raising the limit for foreign institutional investors in government debt, a senior finance ministry official told Reuters earlier this month.
The government said it would sell debt worth 2.2 trillion rupees, sharply above the budgeted 1.67 trillion rupees in the October to March period. "The market is gearing up for further borrowing being announced which will keep pressure on the bond market, but buyers should emerge around the 9 percent mark," a senior dealer with a foreign bank said.
The benchmark five-year swap rate closed up 14 bps at 7.49 percent while the one-year OIS rate ended 12 bps higher at 8.25 percent. "The spread between the 5-year and 1-year swap rates will continue to narrow with the 5-year expected to move up. I expect resistance at around 7.77 percent on the 5-year while the one-year will hover around 8.30-8.35 levels," Paul said. The negative spread between the 5-year and 1-year rate stands at 76 bps, down from 78 bps on Tuesday. The uptick in global equity markets also weighed on bonds. India's main share index closed up nearly 3 percent, its biggest weekly gain in two months.