Bond yields at 2-year high as share sales reduce cash

India’s 10-year bonds fell, pushing yields to a two-year high, on concerns that an auction of notes by the finance ministry on Friday and sales by state governments next week will further reduce the availability of cash to buy debt. Banks borrowed an average Rs 48,500 crore ($10.9 billion) from the central bank’s repurchase auction window each

day this month, compared with Rs 25,100 crore a day in September. India sold Rs 11,000 crore of bonds due in 2017, 2022 and 2040 on Friday. Investors will make the payment on October 25. Funds in the banking system have dropped after Coal India’s initial public offer that ended on Thursday,

India’s biggest share sale to date. “Liquidity is the main concern and that is pushing up yields,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank, Mumbai.

“The auctions will further drain cash.” The yield on the 7.8% note due May 2020 rose seven basis points, or 0.07 percentage points, this week to 8.14 % at close of trade in Mumbai, according to the central bank’s trading system. The price dropped 47 paise per Rs 100 face amount to Rs 97.77.

India plans to buy back Rs 12,000 crore of bonds that are due to mature this year and next on October 25, the central bank said in an e-mailed statement on Thursday. The move is part of plans to repurchase a combined Rs 28,550 crore of debt maturing in 2010 and 2011. Ten Indian states will sell Rs 7,730 crore of 10-year notes on October 26.

The positive effect of the buyback has been negated by the state bond auctions, saidMr Dash. The cost of one-year interest-rate swaps, a fixed payment made to receive floating rates, fell four basis points this week to 6.64%.