Bloomberg News

India Bonds Fall Most in Two Years After Demand Wanes at Auction

October 10, 2011

Oct. 10 (Bloomberg) -- India’s 10-year bonds fell the most in almost two years after underwriters had to pick up government debt that went unsold at an auction last week, fueling speculation demand for the notes is waning.

Yields jumped to the highest level since August 2008 after the central bank asked primary dealers to purchase the remaining 8.99 billion rupees ($184 million) of the 150 billion rupees of debt offered on Oct. 7, according to a statement from the Reserve Bank of India. Rates have surged 40 basis points since the government said Sept. 29 that it will borrow 32 percent more than earlier planned in the six months ending March 31.

“The auction results indicate that investors were probably demanding higher yields as heavy supplies are damping demand,” said Roy Paul, a Mumbai-based deputy general manager of treasury at Federal Bank Ltd.

The yield on the 7.8 percent securities due April 2021 rose 17 basis points, or 0.17 percentage point, to 8.75 percent as of the 5 p.m. close in Mumbai, according to the central bank’s trading system. That’s the biggest increase since November 2009, according to data compiled by Bloomberg. There was no trading in the notes on Oct. 7 due to half-yearly coupon payments, while Oct. 6 was a national holiday.

The Reserve Bank sold bonds due in 2017, 2022, 2027 and 2040 last week, the first issuance for the second half of the fiscal year that ends March 31. Primary dealers bought 1.93 billion rupees of the 2027 notes and 7.06 billion rupees of the 2040 securities at the auctions, the central bank said.

Further Declines Forecast

Ten-year bonds will extend five quarters of losses, pushing yields to a three-year high of 9 percent by the end of 2011, as the government increases debt sales, according to Morgan Stanley.

The Reserve Bank of India may reduce the cash reserve ratio for banks and purchase sovereign bonds to inject money into the financial system as government borrowings drain funds, Pieter Van Der Schaft, Hong Kong-based head of Asian interest-rate strategy at Morgan Stanley, wrote in a research note published today.

The finance ministry will sell a record 4.7 trillion rupees of securities in the year ending March 2012, compared with an earlier estimate of 4.17 trillion rupees, R. Gopalan, secretary of the Department of Economic Affairs, said last month.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose 15 basis points to 8.09 percent, according to data compiled by Bloomberg.

--Editors: Anil Varma, Mark Williams

To contact the reporter on this story: V Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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