Bond yields at 18-month high on debt sales concern

Ten-year bonds dropped for a second day, pushing yields to an 18-month high, on concern that appetite for the debt will cool as the government steps up sales to finance its budget deficit.

The government will issue Rs 12,000 crore ($2.7 billion) of bonds on April 30, the finance ministry said on Monday. The sale will include a new 10-year bond for Rs 5,000 crore. The Reserve Bank of India increased its benchmark policy rates by a quarter-percentage point each at a meeting on April 20.

“The fact that the government’s borrowing programme is robust will continue to push up yields,” said Krishnamurthy Harihar, Mumbaibased treasurer at the Indian unit of FirstRand, South Africa’s secondlargest financial services company. “Given the outlook for inflation and the economy, more interest-rate hikes are also expected.”

The yield on the 6.35% note due January 2020 rose one basis point to 8.07% at the close of trade on Monday. The price fell 0.06, or 6 paise per Rs 100 face amount, to 88.58. The 10-year yield rose as much as four basis points to 8.10% earlier, its highest since October 2008.

The finance ministry’s borrowing in April will total Rs 49,000 crore, 36% more than the same month last year. The government has a record Rs 4.57 lakh crore for the current fiscal.

Normal monsoon rains will help ease inflationary expectations, RBI Deputy Governor KC Chakrabarty said in Mumbai on Monday.

Benchmark wholesale-price inflation accelerated to 9.9% in March, the fastest in 17 months. Deutsche Bank expects the inflation rate to be 6.5% by March 31, 2011, more than RBI’s 5.5% forecast.