Govt bonds fall; investors may cut holdings to buy at auction

May 24 | Updated: May 25 2007, 06:54am hrs
Indian government bonds dropped for a third day, the biggest losing streak this month, on speculation investors will sell to make room for new purchases at a debt auction on Friday. Yields on 10-year notes, which move inversely to prices, rose to the highest this week before the government sells a combined Rs 8,000 crore ($1.97 billion) of eight-year and 15-year debt. India is scheduled to raise Rs 18,000 crore through debt in May, the most in a month in more than a year.

Investors will read just their portfolio ahead of the debt sale, said P Venkatesh, chief of fixed-income at state-owned Corporation Bank Ltd in Mumbai. Prices must decline before some buying support emerges. There is scope for prices to fall further before the sale.

The yield on the benchmark 8.07% note due January 2017 rose 1 basis point, or 0.01 percentage point, to 8.15% as in Mumbai, according to the central bank's trading system. The price fell 0.09, or 9 paise per Rs 100 face value, to 99.45.

India plans to sell 1.55 trillion rupees of bonds in the fiscal year that started April 1, 2% more than in the previous 12-month period, to help meet its budget deficit. The government aims to complete 59% of those sales in the first half of the fiscal year. Bonds may temper losses on speculation a government report tomorrow will show the annual inflation rate fell to the lowest in eight months, deterring the central bank from increasing interest rates.

The latest inflation data should provide a boost if one looks at it from a short-term point of view, said Paresh Nayar, chief trader at Development Credit Bank Ltd in Mumbai.

There is scope for a small rally in prices. Wholesale prices rose 5.22% in the week ended May 12 from a year earlier, slower than 5.44% the previous week, according to the median estimate of 13 economists surveyed by Bloomberg. That will be the lowest rate of price gains since the week to September 9. The ministry of commerce and Industry will issue the report at noon on Friday in New Delhi.