Bond yields touch a year high, then slip

The yield on the 10-year government paper reached the highest level in over a year on fear the central bank will start tightening monetary policy due to high food inflation.

The yield on the 10-year note maturing 2019 touched an intra-day high of 7.70 per cent, as against yesterday’s close of 7.51 per cent, data on the Clearing Corporation of India website showed. At close, the yield was 7.58 per cent, its highest closing level since the paper was introduced in July. The price of the bond fell 25 paise to Rs 95.45 with a face value of Rs 100. The last time the yield on the 10-year note crossed 7.70 per cent was on November 11.

“The bond yield is above our expectation. The rise is due to the sentiment among dealers that the Reserve Bank of India will increase policy rates due to high inflation numbers,” said the treasury head of a private bank.

IDBI Gilts Chief Executive Officer G A Tadas said yields softened after official data showed that industrial production had expanded 10.3 per cent, which was below market expectations.

Separately, in New Delhi, Finance Minister Pranab Mukherjee said tackling rising food prices was crucial. The country was facing difficulties in importing some food items, while prices of some commodities were higher abroad, he said.

Official data released yesterday showed that wholesale food prices went up by 19.05 per cent in the week ended November 28 from a year ago. The cost of one-year interest-rate swaps, or derivatives contracts used to guard against fluctuations in borrowing costs, was little changed. The rate, a fixed payment made to receive floating rates, was 4.88 per cent.

Bond yields have gone up for three weeks in a row. During the current week, the yield fell by 17 basis points from the last Friday’s close of 7.41 per cent.