Bond yields ease; rate hike fear limits fall
MUMBAI: Indian federal bond yields ended marginally down on Thursday as some traders covered short positions, but the underlying sentiment continued to be cautious ahead of the central bank's policy review next week.
Bond yields have witnessed upward pressure on most days this month as sticky inflation has stoked fears of stern monetary action by the Reserve Bank of India (RBI).
"The fall in yields has been most likely due to short-covering by traders because there is no change in the fundamentals," said A.D.M Chavali, general manager of treasury and resource management at Bank of Baroda .
"There is little comfort on inflation and no great improvement in liquidity outlook."
Wariness about the future direction of inflation and monetary policy is evident from the fact that bonds did not react much to the decline in food price inflation, dealers said.
The slowing pace of food price rise was unlikely to stop the RBI from raising key policy rates as the headline inflation continues to be way above its comfort zone, traders said.
Analysts expect the central bank to increase key policy rates by 25 basis points on Tuesday but predict the slump in industrial production growth could stave off a bigger rate hike as the RBI will have to balance inflation and economic recovery.
The country's food price index rose 15.52 per cent and the fuel price index climbed 11.53 per cent in the year to Jan. 8, government data on Thursday showed.
The yield on the most traded 8.13 per cent, 2022 bond ended at 8.17 per cent, down 3 basis points from Wednesday's close.
The second-most traded 8.08 per cent, 2022 bond and the third-most traded 7.17 per cent, 2015 ! bond yie ld ended down 2 basis points each at 8.21 per cent and 8.11 per cent, respectively.
The illiquid benchmark 10-year bond yield was at 8.13 per cent, down 5 basis points from Wednesday's close.
Volumes in the bond market were low at 53.95 billion rupees ($1.18 billion) as per data from Clearing Corp of India, against a usual turnover of 70 billion-80 billion rupees.
In the overnight indexed swap market, the benchmark five-year swap ended at 7.99 per cent, down 3 basis points from previous close. The rate had moved in 7.98-8.04 per cent intraday.
The one-year swap rate ended at 7.42 per cent, steady from Wednesday. Intraday, the rate had moved in 7.40-7.45 per cent band.
Traders were also cautious with the government set to auction 110 billion rupees ($2.42 billion) of bonds on Friday.
Dealers expect Friday's auction to be subscribed fully despite tight liquidity and the view interest rates may harden.
Bond yields have witnessed upward pressure on most days this month as sticky inflation has stoked fears of stern monetary action by the Reserve Bank of India (RBI).
"The fall in yields has been most likely due to short-covering by traders because there is no change in the fundamentals," said A.D.M Chavali, general manager of treasury and resource management at Bank of Baroda .
"There is little comfort on inflation and no great improvement in liquidity outlook."
Wariness about the future direction of inflation and monetary policy is evident from the fact that bonds did not react much to the decline in food price inflation, dealers said.
The slowing pace of food price rise was unlikely to stop the RBI from raising key policy rates as the headline inflation continues to be way above its comfort zone, traders said.
Analysts expect the central bank to increase key policy rates by 25 basis points on Tuesday but predict the slump in industrial production growth could stave off a bigger rate hike as the RBI will have to balance inflation and economic recovery.
The country's food price index rose 15.52 per cent and the fuel price index climbed 11.53 per cent in the year to Jan. 8, government data on Thursday showed.
The yield on the most traded 8.13 per cent, 2022 bond ended at 8.17 per cent, down 3 basis points from Wednesday's close.
The second-most traded 8.08 per cent, 2022 bond and the third-most traded 7.17 per cent, 2015 ! bond yie ld ended down 2 basis points each at 8.21 per cent and 8.11 per cent, respectively.
The illiquid benchmark 10-year bond yield was at 8.13 per cent, down 5 basis points from Wednesday's close.
Volumes in the bond market were low at 53.95 billion rupees ($1.18 billion) as per data from Clearing Corp of India, against a usual turnover of 70 billion-80 billion rupees.
In the overnight indexed swap market, the benchmark five-year swap ended at 7.99 per cent, down 3 basis points from previous close. The rate had moved in 7.98-8.04 per cent intraday.
The one-year swap rate ended at 7.42 per cent, steady from Wednesday. Intraday, the rate had moved in 7.40-7.45 per cent band.
Traders were also cautious with the government set to auction 110 billion rupees ($2.42 billion) of bonds on Friday.
Dealers expect Friday's auction to be subscribed fully despite tight liquidity and the view interest rates may harden.
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