Indian two thousand and five hundred rupee banknotes. (Photographer: Dhiraj Singh/Bloomberg)

India's Short Bonds: Sought by All, Bought by None Amid Glut

(Bloomberg) -- India’s short-duration sovereign bonds seem to have lost their appeal. For a second straight auction, the shortest debt on offer had to be rescued by underwriters.

Just one month ago, primary dealers had told the government that it should sell more short-end debt as there’s demand. Now, they’re facing a glut weeks into the new financial year.

“With supply concentrated in the short-tenor bonds, that segment is facing pressure,” said Gopikrishnan MS, Mumbai-based head of foreign exchange, rates and credit trading for South Asia at Standard Chartered Bank. “We are seeing profit booking from state-owned banks in that segment, which is putting additional pressure.”

India's Short Bonds: Sought by All, Bought by None Amid Glut

Underwriters had to pick up almost all of 30 billion rupees ($449 million) of the 7.37 percent 2023 bonds sold Thursday. On April 20, they bought 3.98 billion rupees of the shortest 6.65 percent 2020 paper auctioned.

Foreigners have been dumping Indian debt amid hardening global yields -- the 10-year U.S. Treasury note pierced the 3 percent mark for the first time in four years this week. That’s hurt short-duration paper -- typically bought by overseas funds -- the most. Some global funds have also changed strategy. They sold 16.8 billion rupees of local debt Thursday, remaining net sellers for nine in the past 10 days, data compiled by Bloomberg show

“Few foreign funds have increased duration,” said Gopikrishnan. “The view is that if at all there are rate hikes, it will be front-loaded and eventually inflation will taper down.”

(A previous version of this story was corrected to fix an error in 2023 bonds coupon.)

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