MUMBAI Government bonds gained for an 11th consecutive session to hit a 26-month high on Monday as hopes of a cut in interest rates by the central bank at the month-end and the absence of large debt sales in January continued to prompt buying.
Traders have been betting the Reserve Bank of India will lower the repo rate by at least 25 basis points (bps) when it meets to review policy on January 29, sparking the debt rally.
The government is also selling only 120 billion rupees of bonds this month in the January 18 week and the total supply of debt in the March quarter is limited to 600 billion rupees, keeping investor demand strong.
"The rally will now get hinged to the extent of repo rate cut expectations in the January policy but before that we have the crucial monthly inflation number," said Arvind Chari, a fixed income fund manager with Quantum Asset Management.
"Even if the December WPI prints at 7.6-7.7 percent, we would still expect the RBI to cut rates by at least 25 bps in January, in which case the 10-year should move 5-10 bps above the repo rate, so around 7.80-7.85 percent," he added.
The benchmark 10-year bond yield closed at 7.90 percent, down 3 bps on the day. The yield hit 7.87 percent during trade, its lowest since September 29, 2010.
The 10-year bond prices have been rising for 11 days in a row with yields dropping by a total 25 bps in these sessions.
Some traders expect the market to consolidate given industrial output data is due on Friday while wholesale price inflation will be released on January 14, potentially adjusting expectations ahead of the RBI policy review.
Total volume stands at a high 542.15 billion rupees compared with the average 250-300 billion rupees seen in December.
The one-month overnight indexed swap rate closed up 1 bp at 7.59 percent while the 5-year rate closed 2 bps higher at 7.16 percent.
(Editing by Subhranshu Sahu)