Eight-month high yields lure buyers

Five-year bonds gained the most in three weeks on speculation yields near the highest level in more than eight months will entice investors.

The government’s failure to sell any of the Rs 12,000 crore of debt at a planned auction on August 7 drove yields on benchmark notes due 2014 to 6.89 per cent yesterday, the most since December.

The increase in yields has made the note more alluring than the 10-year security, said Anoop Verma, a bond trader at Development Credit Bank.

“Yields look quite attractive, particularly on the five- year paper,” said Mumbai-based Verma. “In addition, short- dated securities have relatively smaller capital-loss risk.”

 

The yield on the 6.07 per cent note due May 2014 fell 11 basis points, or 0.11 percentage point, to 6.76 per cent at the close, according to the central bank’s trading system.

Yields on the shorter-maturity note climbed 27 basis points this quarter, compared with a two basis-point increase in the latter. The difference in yields between five- and 10-year securities, or the spread, has shrank to 22 basis points from a seven-year high of 65 basis points reached on July 8, data compiled by Bloomberg show.

The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, declined the most in a month. The rate, a fixed payment made to receive floating rates, dropped to 6.44 per cent from 6.54 per cent yesterday.

Rupee declines
The rupee fell on speculation overseas funds will reduce holdings of emerging-market assets after China said today its exports extended a slump and factory output was below forecasts.

The currency declined to as low as 48.045 a dollar and traded 0.3 per cent lower from yesterday at 47.9625 at the close, according to data compiled by Bloomberg.

The currency dropped to its lowest level in more than a week after foreign funds sold more Indian equities than they bought for a third day in a row on August 7, the longest stretch of net sales in six weeks.

The rupee also declined on concern local refiners will boost dollar purchases after crude oil prices rose for the first time in four days, according to Sanjay Arya, treasurer at state-owned Bank of Maharashtra.

“Growth prospects in the region appear to be shaky, which is why investors are refraining from long-term commitments,” Mumbai-based Arya said.

“The preference is for stronger investments and the rupee at present is not part of that.” It may drop to 48.25 this week, Arya said.

Industrial output in China, Asia’s second-largest economy, climbed 10.8 per cent in July from a year earlier after a 10.7 per cent advance in June. That was less than the 11.5 per cent median estimate of 23 economists in a Bloomberg News survey. Exports dropped 23 per cent, a ninth month of declines.

Offshore forward contracts indicate traders predict the rupee will decline to 48.05 in a month, compared with expectations for a rate of 47.88 yesterday.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars and are used for currencies that aren’t freely convertible.