The Hindu Business Line : Bonds plunge on fears of interest rate hike

BOND prices plunged by over a rupee on Monday as yields rose to their highest in eighteen months, as the Government debt sale had higher than expected yields amid fears of rising interest rates, said dealers.

The yield on 10-year benchmark 7.37 per cent 2014 paper rose to 6.48 per cent, up 20 basis points from Saturday's close. The price on the security fell about Rs 1.50 as it plunged to Rs 106.35.

Bond prices crashed due to fears of higher interest rates following the steep rise in inflation rate.

The Rs 6,000-crore auction of floating rate bonds had its cut-off at 50 basis points above the one year T-bill, higher than market expectation of a 32 basis points spread, said dealers. There was a devolvement of Rs 5,870 crore on primary dealers who had underwritten the issue. The yield on the 30-year Rs 2,000-crore bond came at 7.50 per cent, higher than market expectations of 7.25 per cent, they added. Market participants are worried about interest rate hike, as they fear a further rise in inflation.

Rupee down 5 paise

The rupee fell sharply from early highs on back of huge dollar demand to close at 46.42/43 per dollar on Monday, weaker by about five paise from Friday's close of 46.3750.

The rupee opened at 46.23 as a weaker US currency and lower than expected US jobs data released on Friday spelled strength for domestic currency, said dealers. Thereafter, huge demand for dollars from PSBs, foreign banks and oil companies pushed down the domestic currency significantly, they said.

According to forex dealers, even the expected inflow of $300 million from TCS IPO is unlikely to change in the current trend significantly.