Bonds rise as yields lure investors

India’s 10-year bonds ended two days of losses as yields at their highest level in three weeks attracted buyers.

Yields on notes due January 2020 fell the most in more than a week although inflation concerns checked further declines, said S. Srikumar, chief of fixed-income trading at state-owned Corporation Bank. Reserve Bank of India Deputy Governor Shyamala Gopinath yesterday said rising food prices may spillover to the broader economy and future policy actions will be dictated by evolving inflation and growth conditions.

“Yields are lower because investors see some value around these levels,” said Srikumar.

“But they will be waiting and watching whether the central bank will act on or before” the scheduled review of its policy on Jan. 29.

The yield on the most-traded 6.35 percent bond due January 2020 slipped two basis points to 7.59 percent as of the 5:30 p.m. close in Mumbai, according to the central bank’s trading system. The price rose 0.15, or 15 paise per 100 rupee face amount, to 91.40. A basis point is 0.01 percentage point.

While Subbarao started to withdraw monetary stimulus in October by ordering lenders to keep aside a greater proportion of deposits in government bonds, he has kept the benchmark reverse-repurchase rate unchanged at 3.25 percent since April. Lenders have to keep 5 percent of their cash reserves with the central bank.

Wholesale food prices rose 18.65 percent from a year earlier in the week ended Dec. 12 following a 19.95 percent increase the previous week that was the steepest in 11 years.

Annual Loss
The benchmark 10-year bond yield has climbed 2.33 percentage points in 2009, the biggest annual increase since at least 1999, when it ended that year at 11.22 percent, according to data compiled by Bloomberg.

Indian bonds are the worst performers in 2009 among 10 Asian local-currency debt indexes compiled by HSBC Holdings Plc, slumping 5 percent, as the government stepped up sales of the securities to fund its economic stimulus. India plans to raise a record 4.51 trillion rupees ($96 billion) through debt sales in the fiscal year ending March 31.

The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, decreased. The rate, a fixed payment made to receive floating rates, fell three basis points to 6.91 percent. A basis point is 0.01 percentage point.