Bond yields rise to 4-week high on rising inflation

The 10-year bonds fell for a second day, pushing yields to a four-week high, on speculation that faster inflation will add pressure on the central bank to raise interest rates before its next quarterly policy review in April.

Benchmark notes slid the most in a week as economists estimated before a February 15 government report that wholesale prices rose 8.3% in January, the most since November 2008. RBI governor Duvvuri Subbarao forecast on January 29 that inflation will accelerate to 8.5% by March from as little as 0.5% in September and said interest rates will increase in future.

“The undertone of bonds is bearish with the market bracing for more negative data,” said Srinivasa Raghavan, head of treasury at IDBI Gilts in Mumbai. “Inflation remains the main concern and may compel RBI to tighten monetary policy ahead of its next meeting in April.”

The yield on the 6.35% note due January 2020 rose two basis points to 7.70%, the highest level since January 13, according to the central bank’s trading system. The price dropped 0.14, or 14 paise per 100 rupee face amount, to 90.75. Bonds gained earlier after the government’s completion of its record borrowing for the year ending March 31 encouraged investors to buy debt. India on February 5 completed its record 4.51 lakh crore ($96.6 billion) borrowing for the current financial year.

The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, decreased. The rate, a fixed payment made to receive floating rates, slipped to 7.05% from 7.06% on Monday.