10-year bond yield falls 5 bps to 8.45%

India's benchmark 10-year bond yield dropped to its lowest level in more than 11 months on Thursday on hopes foreign investors would continue to bet on India despite some concerns about US interest rates.

The US Federal Reserve on Wednesday renewed its pledge to keep interest rates near zero for a "considerable time," but also indicated it could raise borrowing costs faster than expected when it starts moving.

Although the dollar gained and US yields rose in response to the Fed's statement, local debt markets bucked the trend with a rally as traders cited signs of heavy buying by foreign institutional investors (FIIs) during the session.

"It appears that some foreign funds started buying bonds and it changed the mood in bonds and equities. The short covering and large FII buying resulted in a big rally," said Paresh Nayar, head of fixed income and currencies at First Rand Bank.

"The rally may continue and, in my opinion, 8.40 per cent will be the first crucial point," he added.

The benchmark 10-year bond yield closed down 5 basis points at 8.45 per cent, its lowest level since October 11. The 10-year paper also saw its biggest single-day decline in yields since August 20.

The 10-year paper had closed at 8.50 percent during each of the previous four trading sessions.

Foreign investors have bought a net $18.97 billion so far in domestic debt markets.

Market participants are now awaiting the outcome of the Scotland referendum for immediate triggers on Friday.

The government's second-half borrowing calendar, due to be unveiled before the month-end, and the central bank's monetary policy review on September 30 will be the next key domestic triggers to watch out for, they added.

Total volumes in the bond market stood at a high $8.93 billion.

In the overnight indexed swap market, the benchmark 5-year swap rate dropped to as low as 7.85 percent during trade, its lowest since July 16 while the one-year rate fell to 8.40 percent, its lowest since Aug. 5.

The 5-year and 1-year rates ended down 8 basis points and 2 basis points, at 7.86 percent and 8.41 percent, respectively.