Bond yield at fresh 3-month peak; looks to auction

Bond yields and swap rates climbed to new peaks on Thursday as traders braced for at least another 25 basis point hike in rates in September with sentiment cautious ahead of a $2.8-billion bond sale. The yield on benchmark 10-year bond closed at the day’s high of 7.91%, its highest since May 7 and up 7 basis points from its previous close.

Bekxy Kuriakose, head of fixed income at L&T Investment Management said the bearishness in the market is likely to continue this month with the 10-year yield likely to touch 8%. The benchmark 5-year overnight indexed swap rate rose as high as 7.41%, its highest since October. 8, 2008. It closed up 16 basis points at 7.40%.

The one-year OIS rate closed at 6.35%, unchanged from Wednesday’s close. It had risen to 6.47% on Monday, its highest since October 31, 2008. “There are concerns that liquidity situation will be tight in the latter half of the fiscal year as well, as any reduction in the government borrowing looks unlikely now,” said K Chandrashekhar deputy general manager with Union Bank in Mumbai. “The market is watching the Friday auction for cues.” Mr Chandrashekhar said the 10-year paper yield may trade in the range of 7.85-7.95% on Friday. India’s food and fuel inflation marginally eased in the week to July 24, leaving unchanged expectations of further monetary tightening by the central bank in the near term.

Traders are worried that the central bank, which has already adopted an aggressive stance with a higher-than-expected rate increase in the July policy review, would follow it up with another hike in key policy rates in September.

The central bank may also prefer to keep the liquidity tight to ensure effective transmission of policy rate hikes which would continue to exert upward pressure on short-term yields, traders said. Dealers will also watch the June industrial output data due on August 12 and July inflation data expected on August 16 for cues.