Bonds up on higher bank demand speculation

Eleven-year bonds gained for a second day on speculation domestic banks are buying more debt to push prices higher, boosting the value of their portfolios, before the financial year-end.

The yield on the 8.08% note due August 2022 dropped two basis points, or 0.02 percentage point, to 8.10% in Wednesday’s trade. Lenders have lifted their holdings of government debt by Rs 37,000 crore ($8.2 billion) this year through February 25, according to the latest central bank data.

Rupee bonds have returned 1.94% in 2011, the third-best performance in the region after Singapore and Taiwan among 10 Asian local-currency debt indexes tracked by HSBC Holdings. “The bond market is showing a bit of an improvement in sentiment, helped mainly by the buying of big banks aimed at pushing up portfolio valuations ahead of March 31,” said RS Chauhan, chief fixed-income trader at State Bank of Bikaner & Jaipur in Mumbai.

“This is a trend we see toward every financial yearend.” The cost of one-year interestrate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased. The rate, a fixed payment made to receive floating rates, added two basis points to 7.47%.