Large investors honour India debt rally with record bond sales

State-run banks sold a record amount of sovereign bonds on Tuesday, reaping rewards from a rally that's sent benchmark yields to their lowest levels in seven years.

National lenders, the biggest holders of government debt, were sellers of a net 130.5 billion rupees ($2 billion) of securities, the most in Clearing Corp. of India data compiled by Bloomberg, going back to 2006. The Reserve Bank of India (RBI) said on Tuesday its policy stance remains accommodative and it will conduct more open-market bond purchases, spurring the biggest gain in benchmark 10-year notes in almost two weeks. It left key interest rates unchanged.

"It seems it was a natural instinct for state-owned banks to book profits after their positions turned vastly profitable," said Vijay Sharma, New Delhi-based executive vice-president for fixed income at PNB Gilts Ltd., a unit of Punjab National Bank. "We believe the rally isn't over and they will turn buyers again."

The yield on sovereign notes due January 2026 dropped two basis points to 7.10 per cent in Mumbai, prices from the central bank's trading system show. That's the lowest close for a benchmark 10-year security since September 2009. PNB Gilts expects the yield, which fell five basis points on Tuesday, to approach seven per cent by the month-end. Indian bonds joined the global debt surge in July, with 10-year notes climbing the most since 2013, as a revival in monsoon rains, improving domestic liquidity and speculation the nation's new central bank chief will be more aggressive in lowering interest rates spurred demand. Bond gains come at a time when state-run lenders have seen their profitability weighed down by higher provisioning for bad loans.

The April-June quarter earnings for Canara Bank were weak, driven only by treasury income, Deutsche Bank AG wrote in a July 26 research note. Strong gains in non-interest income provided support to Union Bank of India, according to a Kotak Securities report this week.

"These are good yield levels for state-run banks to book treasury profits,'' said Ram Kamal Samanta, vice-president for treasury at SBI DFHI Ltd., a unit of State Bank of India, the nation's largest lender.

The RBI said it will buy as much as 100 billion rupees of debt on Thursday. The monetary authority has already infused about 800 billion rupees through such open-market purchases since April 1 as part of efforts to boost cash supply in the financial system.

The rupee rose 0.2 per cent to 66.7150 per dollar on Wednesday, according to prices from local banks compiled by Bloomberg.