October 1, 2014 / 11:54 AM / 3 years ago

Indian bonds snap two-day fall; seen lower next week

* 10-year bond yield ends down 3 bps at 8.48 percent
    * 10-year yield may rise towards 8.60 pct next week-trader
    * Investors await clarity on rate outlook for direction

    By Swati Bhat
    MUMBAI, Oct 1 (Reuters) - Indian government bonds gained on
Wednesday as investors were attracted to debt after markets had
been battered over the previous two sessions, but caution
prevailed ahead of a long weekend. 
    The 10-year bond had surged 7 basis points
over the previous two sessions till Tuesday's close, hitting
their highest level in 2-1/2 weeks on Tuesday over uncertainty
about the Reserve Bank of India's policy review.
    Although the RBI ended leaving rates on hold on Tuesday as
expected, it said it would gradually cut the banks'
held-to-maturity (HTM) ceiling next year. Traders fear that
could lead to volatility as lenders mark more securities to
market, and worry it will reduce banks' demand for future debt
auctions. 
    Bonds thus fell for the week despite the rebound on
Wednesday, snapping a four-week winning streak.
    Traders were also cautious given markets will be closed from
Thursday to Monday, with trading resuming on Tuesday.    
    "Banks balance sheets are not really expanding and with this
cut in HTM, there is really no incremental demand from banks, so
debt sales will remain a concern for markets," said Anoop Verma,
senior vice president, fixed income at DCB Bank.
    The benchmark 10-year bond yield closed down
3 basis points on the day at 8.48 percent, snapping two days of
rise. On the week, yields rose 4 basis points.
    Traders will continue to monitor global crude oil prices and
the rupee for near-term direction. 
    In the overnight indexed swap market, the benchmark
five-year swap rate closed down 1 basis point
at 7.86 percent while the one-year rate also
ended 1 bp lower at 8.44 percent.

 (Editing by Anand Basu)

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