By Khushi Malhotra
Indian government bonds hovered in a tight range early on Friday, as traders braced for a hefty auction of the benchmark note, while accelerating foreign inflows buoyed sentiment.
The benchmark 6.94% 2036 bond yield (IN069436G=CC) was at 6.7199% as of 11:10 a.m. IST, little changed from Thursday's close of 6.7180%. Bond yields move inversely to prices.
Market participants avoided large positions ahead of New Delhi's 340-billion-rupee ($3.57 billion) auction of the 10-year note due later in the day.
"Supply is heavy, but the auction should clear comfortably with foreign demand in the mix. The cutoff price could be 5-6 paisa lower," a trader at a primary dealership said.
Foreign investors have shown strong appetite for the 10-year note, which is among their five most-held bonds under the Fully Accessible Route. They now hold 105 billion rupees of the benchmark note, or 15.4% of their total holdings.
Overseas investors bought nearly $500 million of debt in the first two days of July after a record $3.1 billion in June, amid expectations that Indian bonds will be included in the Bloomberg Global Aggregate Bond Index.
Some investors, however, see more value in short-term notes for accrual gains.
"We continue to like the short end of the yield curve on the back of improved banking sector liquidity due to FCNR inflows going ahead," said Puneet Pal, head of fixed income at PGIM India Asset Management.
Still, a rise in oil prices and U.S. Treasury yields could weigh on Indian bonds.
Brent crude futures were up 0.65% at $72.27 per barrel, while the U.S. 10-year yield rose 5 bps to 4.48% in overnight trade, narrowing the spread with Indian bonds.
RATES
India's overnight index swap rates inched lower as overall sentiment remained upbeat.
The one-year (INR1YMIBROIS=CC) rate eased a bit to 5.78%, while the two-year swap (INR2YMIBROIS=CC) was down 1 bp at 5.92%. The five-year (INR5YMIBROIS=CC) rate edged lower to 6.1950%.
($1 = 95.2800 Indian rupees)