Bonds hit near five-month low after poor auction results

MUMBAI (Reuters) - Government bonds dropped to their lowest level in nearly five months on Friday as investors sold debt after the cut-off yields at an auction came in above market expectations, suggesting investor appetite for debt was low.

Bond yields have risen 22 basis points over the last two weeks, gaining in line with global debt market yields. The weaker rupee and foreign fund outflows from the domestic share and debt markets have also been hurting.

The Reserve Bank of India sold the new 15-year paper at 7.88 percent, slightly above the median of 7.86 percent in a Reuters poll. All other bond cut-offs also came in above market expectations.

The benchmark 10-year bond yield rose as high as 8.01 percent, its highest level since Dec. 17. The paper had closed at 7.99 percent on Thursday but was trading around 7.94 percent when the auction results were announced. It had dropped to a session low of 7.93 percent.

"Usually market loves the new paper and falls over each other to get it so the higher cut-off is a bit of a surprise. It tells us that the market appetite is quite low," said the head of fixed income trading at a foreign bank.

Investors said they expected buying to come in around 8.05 percent levels and said bonds may trade in a 7.90 to 8.10 percent range next week.

(Reporting by Swati Bhat; Editing by Biju Dwarakanath)