Bonds gain most in 3 months on govt debt sale plan

The 10-year bonds advanced the most in more than three months after the government unveiled a lower-than-estimated debt sale plan for the first half of the fiscal year starting April 1.

Yields fell to their lowest in seven weeks after finance secretary Ashok Chawla said the government will borrow Rs 2.87 lakh crore ($63.8 billion) by September 30. A median estimate of eight banks and fund managers forecast Rs 3 lakh crore of debt sales. The government will raise 63% of its full-year borrowing target of Rs 4.57 lakh crore in the first half.

“It is a win-win situation for the government and investors as the government plans to sell more of short-term and medium-term bonds,” said Srinivasa Raghavan, head of fixed income at IDBI Gilts in Mumbai. “The cost of borrowing will come down for the government.”

The yield on the 6.35% note due January 2020 fell 9 basis points to 7.76% at the close of trade in Mumbai on Monday. The price rose by 0.58, or 58 paise per Rs 100 face amount, to 90.47.

Raghavan forecast the 10-year bond yield will drop further to 7.70% by March 31.

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, fell to 4.97% from 5% on March 26.

India plans to sell as much as Rs 150,000 crore of bonds every week, RBI said in a statement Monday.

“Our endeavour will be to see that borrowings go through smoothly,” Shyamala Gopinath, RBI deputy governor said, after a meeting with Chawla and other finance ministry officials.

The government aims to reduce the fiscal deficit to 5.5% of gross domestic product in the year starting April 1 from 6.9% from the previous year, the sharpest reduction in 19 years.