The yield on the ten-year benchmark bond has surged to 8.45% on Friday up from 8.39% on Thursday with the cut-off yield offered by the government at the auction of bonds auction came in at levels that were higher than market estimates. Benchmark bonds completed a seventh weekly decline, the longest run of losses since 2004, on concerns that inflation will continue to remain high due to the hike in the price of diesel. ?Moreover, the money markets remained tight with banks borrowing more than R75,000 crore from the Reserve Bank of India?s liquidity adjustment facility. Besides, both banks and corporates continued to pay high rates to borrow.

?The diesel price increase is going to happen sooner or later and that?s going to feed inflation,? said Krishnamurthy Harihar, treasurer, FirstRand Bank. ?Bond yields will remain under pressure and gradually rise.?

?There is overall bearishness due to the expectation of another round of rate hikes, higher commodity prices and fresh supply of paper,? said Moses Harding, Head ? Global Markets Group, IndusInd Bank. ?Unless there is respite from all these factors, the market may continue to remain weak.?

The government on Friday raised R12,000 crore by selling bonds maturing in 2018, 2021 and 2040.

The Reserve Bank of India (RBI) set a cut-off price for the R5,000 crore worth 10-year paper at R95.81, yielding 8.4316%, while the cut-off price for R4,000 crore bonds maturing in 2018 was R96.35, yielding 8.5406%.

Traders are not supporting the market as they see yields going up even further, said a primary dealer.

The cost of one-year interest-rate swaps went up 10 basis points to 8.21%, while five-year interest-rate swaps closed at 8.16%. For the first time since 2008, investors are paying more to lock in borrowing costs for one year than five, with the difference in the contracts touching minus five basis points yesterday, compared with 40 on April 30, data compiled by Bloomberg show.

The one-year swap, the fixed cost needed to receive floating payments, has risen over 100 basis points this year to close at 8.21% on Friday, while the five-year rate increased 42 basis points to 8.16%, according to data compiled by Bloomberg.

Meanwhile, companies continued to borrow at high rates with the yields on one year commercial paper (CP) ruling at 10.62%, while certificate of deposit for the same tenure commanded 10.07%.

The three-month treasury bill yield stood at 8.1% and that of one-year treasury bill was at 8.35%. The overnight call rate ended higher at 7.45% on Friday from 7.3% on Thursday.

?The yield curve has inverted. There is no premium for time value and hence, investor appetite is for shorter paper,? said Harding.

The Reserve Bank of India (RBI) under the Liquidity Adjustment Facility (LAF) purchased securities worth R76,460 crore from 37 bids at three-day repo auction at a fixed rate of 7.25%, while sold securities worth R665 crore from two bids at three-day reverse repo auction at a fixed rate of 6.25%.