Indian bond yields inch up ahead of large debt supply

Indian government bond yields were slightly higher in early deals on Friday, ahead of debt supply due later in the day, with the major focus staying on the demand for the benchmark 2035 bond.

The yield on the benchmark 10-year note was at 6.2845% as of 10:00 a.m. IST, compared with the previous close of 6.2763%.

“We can see a lot of short positions, over 100 billion rupees in the new benchmark,” a trader with a private bank said. “The auction should sail through as traders would look to square these positions.”

New Delhi is set to raise 360 billion rupees ($4.21 billion) through bonds, including 300 billion rupees of the benchmark note, later in the day. The auction will likely boost trading volumes in this paper as the outstanding would reach 900 billion rupees.
Bond yields slipped briefly at the open, reflecting strong demand from state-run banks that bought bonds worth 106 billion rupees on a net basis on Thursday. It was their biggest single-session purchase in seven weeks, data from clearing house showed.

The Reserve Bank of India will also conduct a seven-day variable rate reverse repo (VRRR) auction for 1 trillion rupees during the day, which the traders will keenly watch to gauge its impact on the banking system’s liquidity surplus. Earlier this month, Reuters reported the RBI could start conducting these auctions as and when required and that it had sought market feedback on aligning the call money rate more closely with the repo rate, which would effectively tweak liquidity levels. The average daily liquidity surplus stood at 2.74 trillion rupees this month.

RATES

India’s overnight index swap rates were a tad higher, in line with government bonds.

The one-year OIS rate was flat at 5.54%, the two-year OIS rate was up over 1 basis point at 5.51% and the liquid five-year was up 1 basis point at 5.69%.