India bonds end week flat, but demand for long notes firms
MUMBAI: Indian government bonds were rangebound in the week ended Friday, as fading inflation and rate-hike worries left traders hunting for direction, while a steeper curve lured buyers into long bonds. The yield on the benchmark 6.94% 2036 bond ended at 6.7578%, versus 6.7582% in the previous session. The borrowing rate failed to breach the 6.75% mark, a key psychological level, as sales by…
Indian government bonds finished the week at a standstill, as worries over inflation and potential rate hikes failed to provide a clear direction for traders. The benchmark 6.94% 2036 bond's yield settled at 6.7578%, matching the previous day's figure. The borrowing rate remained below the 6.75% psychological threshold, as sales by state-run banks countered the demand from foreign banks, according to traders.
"We have witnessed aggressive buying across the curve, with the short and long ends being particularly active, while the middle segment has remained relatively dormant," remarked Alok Singh, head of treasury at CSB Bank in Mumbai. The middle portion of the yield curve, characterized by the most liquid 10-year segment, was held steady by the abundant supply.
Long-term bonds drew value buying this week due to their comparatively higher yields, which narrowed the gap between the yields on the 10-year and 40-year bonds to a six-week low of 69 basis points. The surge in oil prices exerted pressure on bonds, with Brent crude soaring more than 4% this week to $87 per barrel. Higher crude prices may fuel inflation and strain India's finances, given that the country imports the majority of its crude oil requirements.
Liquidity provided by a deposit scheme aimed at attracting dollars from non-resident Indians, along with softer inflation figures in India and the United States, dampened the oil-induced pressure and dampened rate-hike expectations. U.S. consumer prices rose by 0.1% in July following a decline in June, while annual inflation decelerated to 3.4% from 3.5%.
The data has bolstered expectations that neither the RBI nor the Federal Reserve would raise interest rates in the near future, according to traders. India's overnight index swap rates declined for the third consecutive week, as the anticipation of RBI rate hikes waned. The one-year swap rate slipped by 3.5 basis points over the week to 5.73%, the two-year rate decreased by 2 basis points to 5.9225%, and the five-year rate eased by 1.5 basis points to 6.2475%.
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