India bond yields seen little changed ahead of state debt sale

MUMBAI, Feb 25 (Reuters) – Indian government bond yields are expected to be largely flat in early deals on Tuesday, as traders awaited fresh supply of debt through securities auctions by states, while shorter duration bonds remain supported on central bank’s liquidity infusion.

The benchmark 10-year yield is likely to move between 6.68% and 6.72%, a trader with a private bank said, compared with its previous close of 6.7036%.

“There is heavy state debt supply today, and this will definitely test investor appetite especially at a time when the stomach to digest such longer duration supply is not very strong,” the trader said.

Indian states aim to raise 410.54 billion rupees ($4.73 billion) through sale of bonds maturing in five years to 30 years.

This would be followed by New Delhi’s sale of bonds worth 320 billion rupees on Friday, which would be the last scheduled auction from the central government for this financial year.

The supply comes when investors are wary of adding more longer duration debt on their portfolios.

The Reserve Bank of India will conduct a three-year dollar/rupee buy/sell swap on February 28, which will lead to a liquidity infusion of around 870 billion rupees ($10.03 billion) and the first leg of the transaction will settle on March 4.

India’s shorter-duration government bond yields fell, after the swap announcement, which will shore up rupee liquidity for up to three years, but longer duration bond yields were not much enthused as this has been taken as a signal that more debt purchases are unlikely immediately.

Since mid-January, the RBI has infused more than 3.6 trillion rupees into the banking system, including 1 trillion rupees of open market operations (OMOs) and 388.15 billion rupees via secondary market bond purchases.

The RBI also infused around 440 billion rupees through a dollar-rupee buy/sell swap and 1.83 trillion rupees via long-term repos.

** Ten-year U.S. Treasury yield at 4.3752%; two-year yield at 4.1497%

** Indian states aim to raise 410.54 billion rupees through sale of bonds

** RBI to conduct 2-day variable rate repo auction for 750 billion rupees ($1 = 86.7230 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Rashmi Aich)