Indian Bonds Have Worst Week Since January on Inflation, Auction

India’s 10-year bonds completed the worst week since January, pushing yields to a three-year high, on concern inflation near a 13-month high and increased debt sales will damp demand for debt.

The commerce ministry reported today the wholesale-price index rose 9.72 percent in September from a year earlier after a 9.78 percent increase in August, which was the most since July 2010. The pace of price gains is above the central bank’s “comfort level,” Governor Duvvuri Subbarao said yesterday. Underwriters picked up 40.4 billion rupees of unsold securities as the government raised 130 billion rupees ($2.7 billion) at an auction today, signaling demand for the notes weakened.

“Inflation is still at elevated levels, so there is a threat of one more interest-rate increase,” said R.S. Chauhan, a Mumbai-based chief dealer of currencies and fixed income at State Bank of Bikaner & Jaipur in Mumbai. “Investors are generally bearish on bonds as debt supply is heavy.”

The yield on the 7.8 percent notes due April 2021 rose 20 basis points, or 0.20 percentage point, this week to 8.78 percent in Mumbai, according to the central bank’s trading system. That is the highest level for benchmark 10-year rates since August 2008, according to data compiled by Bloomberg. The rate climbed six basis points today.

The 10-year yield has increased 34 basis points since the government boosted its bond-sale target for the six months through March 2012 by 32 percent on Sept. 29.

The Reserve Bank of India, which raised interest rates six times this year to slow price gains, will review borrowing costs next on Oct. 25.

Appetite Waning

Bids for 10-year bonds at today’s auction were 1.79 times the amount on offer, the lowest level in two months, according to Bloomberg calculations based on central bank data.

“Investors are demanding higher yields as there is a glut of debt supplies ahead,” said Killol Pandya, the Mumbai-based head of fixed-income investments at Daiwa Asset Management (India) Pvt.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose 26 basis points this week to 8.20 percent, according to data compiled by Bloomberg. It rose 13 basis points today.

To contact the reporter on this story: V Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net