Indian federal bond yields and swap rates dipped on Tuesday on expectations cash conditions would improve, but a $2.6 billion government debt sale this week kept investors cautious. At 10:33 a.m. (0503 GMT), the yield on the benchmark 10-year bond was down one basis point at 7.60 percent from the close on Monday, when it had hit 7.65 percent during trade its highest since June 25. Volumes were moderate at 27.75 billion rupees ($593 million) on the central bank's trading platform.
The one-year swap rate shed four basis points to 5.60 percent. On Monday, it had climbed to 5.68 percent intraday, its highest since Nov. 19, 2008. "There are first signs of liquidity improvement. With all third-generation and broadband auction outflows now past, the worst of liquidity is over," said a senior trader with a mutual fund. "I think 1- year swap rate has peaked yesterday and I expect it to move to 5.50 and below," he said.
Traders said liquidity in the system had improved following likely government spending last week. Cash balances of commercial banks with the Reserve Bank of India dropped to 2.9 trillion rupees on July 2 from 3.08 trillion a day earlier, data on the central bank's website showed, indicating the government may have started to spend more money. Dealers said lower US yields were also supporting prices.
US 10-year Treasury notes rose in Asian trading on Tuesday, supported by ongoing worries about the outlook for the US economy, with moves exaggerated by thin trading volumes. However, domestic sentiment was cautious after the government said late on Monday it would sell 120 billion rupees of bonds on Friday.
Traders had been hoping the government would reduce the scheduled borrowing as it did last week because of tight cash conditions. The central bank is likely to raise interest rates again in its quarterly review on July 27, a new survey found, and rates at the end of the year are likely to be higher than forecast before Friday's rise.
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