Indian government bonds fell in early trading Friday as traders positioned themselves ahead of substantial new debt supply, reflecting ongoing concerns about demand for the quarter's record-breaking bond sales program.

Bond Market Performance

The benchmark 10-year bond showed clear signs of investor caution in morning trading:

"Traders are selling debt at any little rise in price as the market knows more debt is lined up," explained a trader with a state-run bank, highlighting the cautious sentiment prevailing in the market.

Today's Debt Auction

New Delhi has scheduled a significant bond auction for later in the day, adding to existing supply concerns:

"The near-term tone is cautious because the street has to digest a lot of issuance, and that keeps yields sticky," noted market participants, emphasizing the supply-demand imbalance concerns.

Record Quarterly Issuance Program

The current auction is part of an unprecedented borrowing program that continues to weigh on investor sentiment:

This massive issuance schedule represents the largest quarterly bond sale program, creating sustained pressure on bond prices despite supportive central bank measures.

RBI Support Measures

The Reserve Bank of India has implemented substantial support measures to manage the heavy supply, though with limited market impact:

The central bank's selective approach to bond purchases has dampened expectations that it would include the former benchmark bond and other actively traded securities in these operations.

Interest Rate Environment

The overnight index swap market showed limited activity, reflecting the cautious trading environment:

• One-year OIS: No trading activity recorded
• Five-year OIS: Marginally higher at 5.95%
• Overall activity: Concentrated in longer-term swap curve

Market participants are also monitoring the potential inclusion of Indian bonds in Bloomberg's Global Aggregate Index, with an announcement expected before the end of next week, which could influence future trading dynamics.

Indian government bonds rebounded on Tuesday, snapping a two-session losing streak, as the market successfully absorbed hefty state debt supply without major yield spikes. The benchmark 10-year yield settled at 6.61%, down from the previous close of 6.63%, boosting overall market sentiment.

Successful State Debt Auction Calms Market Concerns

Indian states successfully raised ₹30,100 crore ($3.34 billion) through bond sales, marking a positive start to the ambitious ₹5 lakh crore borrowing program for the January-March quarter. While the notes were sold at yields slightly higher than previous auction cutoffs, investors found relief in the fact that the auction was fully subscribed despite concerns about faltering demand.

Traders had expressed concerns about the auction's success following last week's sharp price decline after states announced the record borrowing plan. The 10-year bond yield had risen 5 basis points in two sessions following the announcement.

Strong Institutional Support Drives Recovery

State-run banks emerged as key buyers during the recent volatility, purchasing a net ₹12,500 crore over three sessions. These lenders have been actively acquiring bonds as the Reserve Bank of India continues its supportive open market operations.

The RBI bought bonds worth ₹50,000 crore on Monday and is set to purchase another ₹1 lakh crore of bonds in January. The central bank will also conduct a foreign exchange swap worth $10 billion next Tuesday, providing additional liquidity support.

Corporate Debt Market Maintains Strong Momentum

The corporate bond segment continues to witness robust activity, with Adani Enterprises recently demonstrating strong market appetite by fully subscribing its ₹1,000 crore NCD issue within 45 minutes. Multiple companies have received board approvals for significant debt fundraising programs across sectors.

Market Focus Shifts to Budget Announcement

With state debt supply concerns easing following the successful auction, market attention is likely to pivot to the central government's budget announcement in February. "Traders are now cautiously waiting for the budget as the gross borrowing number beat expectations due to maturities this year," said Alok Sharma, head of treasury at ICBC, Mumbai.

India's longer-duration overnight index swap rates fell, reversing course after three sessions. The one-year OIS inched lower to 5.48%, while the two-year OIS rate fell 1 basis point to 5.58%. The five-year OIS rate declined 2.25 basis points to 5.95%.

Rating Upgrade Supports Market Confidence

Market sentiment continues to benefit from S&P Global Ratings' upgrade of India's long-term sovereign credit rating to BBB. Investors are also monitoring the upcoming announcement regarding Indian bonds' inclusion in the Bloomberg Global Aggregate Index, expected next week, though market participants believe this development is largely priced in.