Bond yields at their lowest since December level

Bond yields fell to their lowest in 5- ½ months on Wednesday, mirroring US Treasuries after a German short-selling ban triggered demand for safe-haven government debt.

Expectations that India may lower its borrowing requirement for the 2010-11 fiscal due to fresh cash inflows from the auction of third-generation spectrum also supported local bonds.

“There was a lot of buying in US Treasuries. It was a factor which triggered buying in Indian government bonds,” said Paresh Nayar, head of foreign exchange and money markets at First Rand Bank in Mumbai.

“The market has discounted that the 3G inflows would be larger than what was expected. The 3G auction results demonstrate that the government borrowing will sail through smoothly and there won’t be much of stress,” he added.

The yield on 7.80%10-year benchmark bond ended at 7.44%, off an intra-day trough of 7.39%, its lowest since December 3, and from Tuesday’s close of 7.50%. Volume was heavy at Rs 20,790 crore ($4.5 billion) on RBI’s trading platform.

The yield on the 10-year bond has eased 31 basis points so far in May as earlier expectations of the central bank raising rates ahead of its next policy review on July have now receded.

The benchmark five-year interest rate swap was at 6.40/44%, from the previous close of 6.49/52%. In interest rate futures on the National Stock Exchange, the June contract implied a yield of 8.2102% while the September contract ended at 8.1091%.