Strongest week for bonds in nearly a year; R surges too

Better-than-expected rains, Fed outlook aid rise

GOVERNMENT bonds due in 2024 completed the biggest weekly gain since they were first issued in July last year as a better-than-expected start to monsoon eased concern that inflation will quicken.

Monsoon has been 10% above average since June 1, according to Met department, defying forecasts that a developing El Nino would curb rainfall and hurt crops, potentially boosting food costs. The IMD has predicted June-September rainfall to be 88% of a 50-year average.

Bonds also gained as the Federal Reserve signalled it will raise interest rates gradually, paring chances of sudden outflows from emerging markets.

“Good monsoon rains have aided sentiment,” said NS Venkatesh, chief financial officer at IDBI Bank. “The Fed’s outlook on rates has comforted investors and that’s reflected in bonds.”

The yield on the notes due July 2024 slid 23 basis points from June 12 to 7.88% in Mumbai, prices from the central bank’s trading system show. The yield on the bonds due in May 2025, the new 10year security issued last month, fell 18 basis points this week.

The yield on the 2024 bonds fell seven basis points on Friday on speculation the government may make some adjustments to debt limits set for foreign institutional investors, said Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered in Mumbai.

Fed chair Janet Yellen this week signalled that an improvement in the US economy is keeping it on track to lift borrowing costs this year, though subsequent increases are likely to be more gradual than anticipated earlier.

The yield on the 2024 bonds had jumped 29 basis points in the previous two weeks on concern inflation will accelerate, preventing the central bank from easing monetary policy further.

Yield on the notes due July 2024 slid 23 bps from June 12 to 7.88%. The yield on the bonds due in May 2025 fell 18 bps this week