Bond yields at 1 month high on debt plans

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Mumbai: Indian federal bond yields spiked to near one-month highs on Wednesday after the government unexpectedly announced a hefty $10 billion additional borrowing plan.

After market hours on Tuesday, the government said it would issue 500 billion rupees ($10.3 billion) of fresh bonds until the end of the current fiscal year that ends in March, with 150 billion rupees of bonds slated on Friday.

At 10:51 a.m., the 10-year benchmark bond yield was at 5.83 per cent, a level it last tested in mid-December and 53 basis points above Tuesday's close of 5.30 per cent.

On Monday, the 10-year yield fell to an all-time low of 4.86 per cent in intraday trading after the RBI slashed rates sharply over the weekend.

Arvind Sampath, director and head of rates trading at Standard Chartered Bank in Mumbai, said the big auction and lack of any buyback of intervention bonds would pressure yields higher.

"There would be a sharp selloff in bonds as the market would extract its price in the auctions," he said.

The government has already borrowed 1.77 trillion rupees of bonds this year, compared with 1.5 trillion rupees in 2007/08.

In early December, the government set a borrowing plan of $9 billion between Dec. 5 and Feb. 20, and had raised $4.1 billion by Jan. 2.

The additional debt offering announced on Tuesday sharply raised the total for the remaining of the financial year and traders said this would push up the 10-year yield to 6 per cent in the near term.

"The move came in as a surprise as the borrowing was front loaded in January and there is going to be no MSS buyback," said the head of fixed-income at a mutual fund.

Market stabilisation scheme, or MSS, are bonds sold by the RBI to soak up excess cash injected through its intervention in the currency market. The outstanding balance stood at 1.20 trillion at end-December.

Volume was heavy at 31.75 billion rupees on the RBI's electronic trading platform with the 2018 bond being the most heavily traded.

Analysts said the higher borrowing was unlikely to cause a cash crunch as banks have been parking an average 583 billion rupees of excess cash at the RBI's daily money market operations this week.

Satish Jeurkar, head of fixed-income at Saraswat Cooperative Bank, said the papers on sale were illiquid and demand would arise mainly from insurance firms and pension funds.