Bonds gained for the third day as banks used surplus cash to buy securities, pushing the yield on the 91-day treasury bill to the lowest in almost three years at an auction today. | |
| The 10-year bond yield dropped to a five-month low as slower inflation spurred speculation the central bank won't raise interest rates when it meets on July 31. |
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| The central bank's dollar purchases to stem gains in the rupee helped increase funds at banks, the biggest buyers of government debt. |
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| ``Investors are preferring bonds because the huge amount of money in the system has kept lending rates low,'' said P. Venkatesh, chief of fixed-income at state-owned Corporation Bank Ltd in Mumbai. ``Large amount of surplus will persist in the system so long as the rupee shows a tendency to strengthen.'' |
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| The yield on the benchmark 7.49 per cent note due April 2017 fell 7 basis points, or 0.07 percentage point, to 7.78 per cent at close in Mumbai, according to the central bank's trading system. The price rose 0.46, or 46 paise per 100 rupee face value, to 98.05. Yields move inversely to prices. |
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| The government sold 91-day treasury bills at a weekly auction today at a 4.5022 cut-off yield, matching the lowest since August 2004. The central bank got bids worth Rs 91.77 billion for Rs 20 billion of 91-day treasury bills it sold today. That suggests demand for debt securities was strong. |
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| Funds in the banking system increased after the central bank said on July 17 it bought $4.43 billion worth of foreign exchange in May, the most in three months. That was probably to halt the rupee from extending its gains from a nine-year high. The bank issues data of its purchase and sale of dollars with a two-month delay. |
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| Bonds also advanced on optimism the central bank will refrain from raising interest rates at a policy meeting this month as inflation slows. |
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| ``I am being optimistic,'' Venkatesh said. ``Inflation at the current rate does not warrant action, at least as of now.'' |
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| The overnight rate in the money market averaged 0.5 per cent this month, compared with 2.4 per cent in June, according to data compiled by Bloomberg. A drop in money market rates makes it cheaper for investors to buy debt with borrowed funds. |
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| Inflation slowed after the Reserve Bank of India increased its overnight lending rate to a five-year high of 7.75 per cent on March 30. The rate of weekly price gains stayed below the Reserve Bank's target of 5 per cent in the six weeks through June 30, according to government data. |
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