Bonds gain on budget's deficit fall optimism

Eleven-year bonds gained for a third day as government efforts to rein in the budget deficit bolster demand for the securities.

The yield on the 8.08% bond due August 2022, the government's most-traded debt, fell four basis points to 8.06% in Thursday's trade.

The shortfall will ease to 4.6% of gross domestic product in the 12 months through March 2012 from 5.1% in the current period, Finance Minister Pranab Mukherjee said in his Budget speech this week. The government plans debt sales of 4.17 lakh crore ($92.6 billion) in the next fiscal year, less than the 4.27 lakh crore raised in the past 11 months. No sales are scheduled this month.

"As of now, the proposal to reduce the budget deficit is providing some comfort," said Roy Paul, deputy general manager at Federal Bank in Mumbai. "The lack of debt supplies this month is also a positive."

Food inflation slowed to near a three-month low after supplies of fruits and vegetables increased from the winter harvest. The index measuring wholesale prices of agricultural products rose 10.39% in the week ended February 19 from a year earlier, the commerce ministry said in a statement on Thursday. The gain is the least since November 27 and compares with an 11.49% rise last week.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, was little changed at 7.44%.