Government bonds give up early gains as traders sell at a profit

Government bond yields gave up gains by the end of the trade on Friday after state-owned banks sold bonds at a profit after the decline in yields in the early trade, dealers said. Traders also maintained caution ahead of US non-farm payroll data.

The yield on the benchmark 10-year government bond touched the day’s low of 7.02 per cent as the government announced lower-than-expected gross borrowing for financial year 2024-25 on Thursday.

The yield on the benchmark bond settled at 7.06 per cent flat against Thursday.

“There was post-budget euphoria in the morning. The market went up sharply after which there was profit booking by nationalised banks,” said a dealer at a state-owned bank. “The US non-farm payroll data is due which will give a clear picture on the US Treasury. Typically, nobody wants to carry a position on Friday ahead of data release, that’s why it reversed gains,” she added.

Meanwhile, the rupee settled 5 paisa stronger on Friday on the back of foreign inflows. The currency appreciated up to Rs 82.83 per US dollar during the day, compared to Rs 82.98 a dollar on Thursday. However, the Reserve Bank of India intervened in the foreign exchange market through dollar buys, which capped gains, dealers said.

“Even after two major events, the US Federal Reserve interest rate decision and Indian Interim budget were unable to shake the rupee much. Focus remains high on Indian growth and funds flowing into Indian markets strongly. The well-equipped structure provides a cushion to the rupee. Broadly, the rupee continues in a range of Rs 82.70 to Rs 83.25 a dollar,” said Jateen Trivedi, VP Research Analyst at LKP Securities.

The government aims to borrow Rs 14.13 trillion in the next financial year, against Rs 15.43 trillion gross borrowing for the current financial year. The borrowing program for the current year ends on February 16.

Gains in short term government bonds were limited during the day given the tight liquidity condition in the banking system. The liquidity deficit widened to Rs 2.67 trillion on Thursday, according to data by the central bank.

Consequently, banks were reluctant to park money at the Reserve Bank of India’s 4-day variable rate reverse repo auction on Friday. They parked Rs 3,975 crore, against a notified amount of Rs 50,000 crore at a weighted average rate of 6.48 per cent. Market participants said that the RBI conducted the auction in order to bring stability in the money market rates which had fallen below 6.50 per cent. The central bank wants to keep the money market rates between 6.50 per cent-6.75 per cent, they said.