Bond yields at 4-month high

The country's 10-year bonds advanced as four-month high yields lured investors betting the central bank won't change a rule forcing lenders to hold debt.

Bonds halted three days of decline as some traders expected the central bank not to immediately change a rule that requires lenders to hold at least 25 percent of deposits in government securities.

Yields on January 12 surged the most in more than four years after the government said it will arm the central bank with freedom to set the debt-buying requirement.

"I don't think the central bank will lower the limit any time in the near future, not at least in 2007,'' M A Sardesai, treasurer at state-owned Bank of Maharashtra, said in Mumbai.

``The central bank wants less money in the hands of banks if credit growth has to be curbed.''

The yield on the benchmark 8.07 per cent bond due January 2017 fell 5 basis points, or 0.05 percentage points, to 7.79 per cent at the 5:30 pm close in Mumbai, according to the central bank's trading system. The price rose 0.33, or 33 paise per Rs 100 face amount, to 101.93. Bond yields move inversely to prices.

A lower debt-buying requirement may prompt banks to sell securities and raise funds for lending. The central bank has been making money more expensive in an economy that's poised to grow 9 percent, the fastest pace in at least six years.

The central bank last month decided to raise the amount of cash lenders need to set aside to cover deposits in two phases, removing an estimated Rs 135 billion ($3 billion) from the banking system.

"It's difficult to imagine how they can free up cash at a time when they're tightening money supply,'' said S Ananthanarayan, chief bond trader at Kotak Mahindra Capital Co, a Mumbai-based primary dealer that underwrites government debt sales. ``Policy contradictions in a thin market are causing volatility.''

The yield on the benchmark bond rose as much as 6 basis points earlier in the day as the daily average volume of debt traded last week dropped to almost a fifth to about Rs 40 billion in two months, according to data available on the web site of the Clearing Corporation of India Ltd.

Bonds dropped in early trading after a government report showing the fastest pace of factory production growth in 11 years added to concern the central bank will raise interest rates later this month.

Benchmark bonds also dropped after data last week showed wholesale prices rising faster than central bank forecasts.

The securities added to losses on Jan. 12, when they slumped the most in more than four years following the government's proposal last week to allow lenders to hold less debt as reserves.