Bonds gain after debt sales unexpectedly cut in Budget

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Friday , February 29, 2008 at 2330 hrs The country's benchmark bonds rose, capping the best week since January. 11, after the government unexpectedly said it will reduce the size of its debt sales next fiscal year.

The yield on the 2017 debt fell to the lowest level in more than a week after finance minister Palaniappan Chidambaram, presenting the budget for the year starting April 1, said he aims to raise Rs 1.45 trillion ($36.3 billion) to meet the Union budget deficit, 7% less than in the current year.

Economists and traders in a Bloomberg News survey expected the amount to rise by 7% next fiscal year.

''Bonds have rallied because the targets for market borrowings and the fiscal deficit are lower than expected,'' said Manoj Swain, head of debt trading at Standard Chartered Plc based in Mumbai.

The yield on the most-traded 7.99% note due July 2017 dropped 13 basis points this week to 7.56% at the 5:30 p.m. close in Mumbai, according to the central bank's trading system.

The price rose 0.86, or 86 paise per Rs 100 face amount, to 102.81. A basis point is 0.01 percentage point.

Chidambaram set the budget deficit target in the coming fiscal year at 2.5% of gross domestic product, down from an estimated 3.1% in the current year.

Gains in bonds were tempered by concern record crude oil prices will fan inflation, reducing the value of the debt's fixed payments.