Bonds fall on fears govt will hike borrowings in H1

The 10-year bonds fell, pushing yields to their highest level since October 2008, on concern the government will increase borrowing in the first half of the year beginning April, when the bulk of debt will mature.

The government will raise a record Rs 4.57 lakh crore ($99.3 billion) in the next fiscal, Finance Minister Pranab Mukherjee said on February 26. Debt payments will more than double to Rs 1.14 lakh crore, of which almost three quarters are scheduled to be repaid in the four months through July, according to the government’s budget.

“Since you have heavy redemption, you have to be prepared for big bond sales in the first half,” said Rajeev Radhakrishnan, who manages the equivalent of $4 billion of debt at SBI Funds Management, a unit of the nation’s biggest bank, in Mumbai. “Yields will be under pressure until the auction calendar is announced.”

The yield on the 6.35% note due January 2020 rose eight basis points to 7.94%, according to the central bank’s trading system. That is the highest yield level for a 10-year bond since October 8, 2008. The price fell 0.50, or 50 paise per Rs 100 face amount, to 89.26.

The yield will be between 7.75% and 8% this month, Radhakrishnan predicted. The government will soon start discussion with the central bank on next fiscal’s borrowing schedule, Finance Secretary Ashok Chawla said on February 26.

The plan to auction licenses for nationwide third-generation mobile phone services will be a key factor deciding the borrowing schedule in the first half, said Radhakrishnan. India expects to earn Rs 35,000 crore from the auction. The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased on Tuesday. The rate, a fixed payment made to receive floating rates, rose to 7.05% from 7.02% on February 26.