Ten-year bonds gain a second day as inflation may ease

Ten-year bonds gained for a second day on speculation the nation’s inflation rate will extend a three-month decline.

A government report will probably show next week that annual gains in the benchmark wholesale-price index slowed last month to 9.6%, the least since January. RBI, which has raised borrowing costs four times so far this year to cool inflation, is scheduled to review monetary policy on September 16.

“The bond market outlook depends on how the inflation rate will turn out in the coming months,” said RVS Sridhar, senior vice-president at Axis Bank in Mumbai. “Recent wholesale price index numbers were promising. Yields may remain in a range in the short term.”

The yield on the 7.80% note due May 2020 dropped one basis point to 7.94% at the close of trade on Wednesday. The price rose 0.08, or 8 paise per Rs 100 face amount, to 99.07.

The government will offer Rs 11,000 crore ($2.4 billion) of bonds maturing in 2015, 2022 and 2027 on Friday, which are part of the government’s record Rs 4.57 lakh crore borrowing for the fiscal that began April 1.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, was unchanged. The rate, a fixed payment made to receive floating rates, was at 6.11%.