Bonds retreat a second day on inflation woes

Eleven-year bonds dropped the most in a week on concern faster inflation will erode returns from the nation's fixed-income securities.

Yields on debt due 2022 rose for a second day to a three-week high after the Reserve Bank of India raised its end-March inflation forecast last week to 8% from an earlier estimate of 7%. The central bank increased its repurchase rate for the eighth time in a year to 6.75% on March 17 to cool wholesale-price gains that unexpectedly accelerated to 8.3% in February from a year earlier.

"The inflation target has been raised to 8% and that's not a comforting number for the bond market," said Krishnamurthy Harihar, treasurer at FirstRand. "Things just aren't cooling down on the price front and the tone of the RBI's policy remains quite stringent."

The yield on the 8.08% note due August 2022 climbed three basis points, or 0.03 percentage point, to 8.13% in Monday's trade, according to the Reserve Bank of India's trading system. That is the highest level since February 25.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased.

The rate, a fixed payment made to receive floating rates, rose three basis points to 7.48%.