Bonds advance as maturing funds are reinvested

Ten-year bonds rose for a fifth day, the longest winning streak in seven weeks, on speculation demand for the securities will increase after Rs 26,900 crore ($5.9 billion) of debt matured last week.

The yield on the benchmark 7.80% note due May 2020 dropped three basis points to 7.46% at the close of trade on Monday. The price rose 0.20, or 20 paise per Rs 100 face amount, to 102.35. Earlier, the yield touched 7.42%, its lowest since November 27.

Yields fell to the lowest level in five months as banks are probably adding to bond holdings after outstanding deposits climbed to an all-time high of Rs 45.6 lakh crore as of April 30, said Sanjay Arya, a treasurer at Bank of Maharashtra. Lenders are required to invest 25% of liabilities in Indian notes.

US 10-year Treasury yields stayed near the lowest in more than a week amid Europe crisis concerns.

“We definitely see some replacement demand as cash is ample after the redemption,” said Arya. “The general risk aversion around the world is also driving demand for safe-haven assets as investors shun stocks.”

The government plans to sell Rs 13,000 crore of bonds on May 21 as part of its record Rs 4.57 lakh crore borrowing programme for the current fiscal that began April 1. The finance ministry will sell Rs 5,000 crore each of notes maturing in 2016 and 2022 and Rs 3,000 crore of securities due in 2026, RBI said in an e-mailed statement.

The cost of one-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, was 4.80%, compared with 4.84% on May 14.