Bonds in India Slide as Auction Signals Weak Demand Again

(Bloomberg) -- Sovereign bonds in India fell to a three-month low after investors demanded higher yields at a weekly debt sale and as minutes of the central bank’s interest rate meeting showed members have turned more hawkish.

The yield on the benchmark 10-year debt rose 14 basis points to 6.09%, the highest since early May. Yield on the most traded 6.19% 2034 bond, a paper auctioned on Friday, was up 15 basis points at the close.

The central bank sold the 2050 bond, the longest-maturity debt, at a cutoff yield of 6.7596% as against 6.65% estimated in a Bloomberg survey of five traders. The 2034 bond was sold at a yield of 6.4071% versus an estimated 6.38%. The RBI accepted 20 billion rupees extra in the 2034 sale.

“Higher cutoffs at today’s bond auction indicates that the RBI is fine with higher yields, that kind of unnerved the market,” said Naveen Ramnani, a fixed-income trader at UCO Bank in Mumbai. Bonds will come under more pressure if there is no support from the RBI given the huge supply overhang, he said.

A sale of the benchmark 10-year debt had to be rescued by underwriters last week. The central bank is yet to signal whether it will buy more bonds to help ease a record 12 trillion rupees supply in the fiscal year.

The weak demand at the auction comes after minutes of the RBI’s policy meeting published Thursday showed rate panelists fretted over a recent surge in consumer inflation, preferring to wait for price pressures to wane before considering more steps to address the “deepest contraction in history.”

The RBI may be at the end of the rate-cut cycle “and expectations of large cuts must be anchored as inflation is unlikely to materially decline from the current levels,” Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, wrote in a note. “It would better serve the financial markets if RBI continues to resort to unconventional policy measures.”

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