10-yr yield at 1-mth low

The 10-year bond yield dropped to the lowest in a month after the government cut the size of a planned debt sale this month to less than half, easing concern that extra supply will push up yields.

Bonds extended gains for the second day after the government said it would sell Rs 4,000 crore ($900 million) of debt at an auction scheduled for January 12, instead of Rs 9,000 crore proposed earlier. The ministry of finance said it took the decision after "a review of the current borrowing requirements", without giving further details.

"The pressure from the supply of debt will be eased and this is a boost to the sentiment for bonds,'' said Piyush Wadhwa, a bond trader at ICICI Securities Ltd, a Mumbai-based primary dealer that underwrites government auctions.

The yield on the benchmark 8.07 per cent 2017 paper fell 6 basis points to 7.48 per cent at the 5:30 pm close of trading in Mumbai, according to the central bank's trading system. A basis point is 0.01 percentage point.

The price rose 44 paise per Rs 100 face amount, to Rs 104.12. Bond yields move inversely to prices.

Ten-year notes dropped for a third year in 2006 as overnight lending rates between banks climbed to the highest in more than five years in December after advance tax payments by companies drained the surplus cash held by banks.

Lenders, the biggest buyers of government debt, also set aside more funds to cover their deposits after the central bank raised the cash deposit ratio by half a percentage point.

The call-money rate tripled last month to as high as 19.5 per cent on December 29, according to data compiled by Bloomberg. A higher rate makes it more expensive to purchase bonds with borrowed funds.

The reduction in the borrowing amount "should boost prices, given market conditions,'' said Ashish Agrawal, a fixed-income strategist at Merrill Lynch & Co in Hong Kong.