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MUMBAI: Government bonds rose on Tuesday after three sessions of fall as buying emerged from domestic mutual funds following recent steep falls, though worries about continued foreign selling remain with the rupee still within sight of record lows.
Mutual funds, which are anticipating redemption pressures at the end of June, were spotted switching out of corporate bond funds and turning to more liquid government securities, according to some traders.
Government bonds are also looking more attractive to funds after recent falls, traders said.
Some trader repositionings were also seen helping the mild recovery in bonds, dealers added.
Still, foreign institutional investors sold a net $5.5 billion in 23 trading sessions to Friday and that is likely to prevent gains in domestic bonds.
"There was some value buying but nervousness among FIIs still prevails," said Paresh Nayar, head of fixed income and foreign exchange trading at First Rand Bank.
The benchmark 10-year bond yield closed at 7.50 per cent, 2 basis points (bps) below its Monday's close but up from the day's low of 7.46 per cent.
The old 10-year paper, which is still among the most liquid papers, closed down 1 basis point at 7.68 per cent after having dropped to as low as 7.63 per cent earlier in the day.
Nayar said he expected the old 10-year paper to be capped at around 7.75 per cent.
Total volume on the central bank's electronic trading platform was slightly better at 328.95 billion rupees compared with 192.6 billion rupees on Monday but still far lower than the average 500 billion rupees seen until mid-June.
Mutual funds stepped in to buy bonds after the new 10-year bond yield rose 26 bps in the three trading sessions to Monday.
A recovery in the US Treasury prices also helped sentiment. A narrowing differential between the two markets has been a key factor prompting foreign fund withdrawals in recent weeks.
In the overnight indexed swap market, the benchmark five-year OIS rate ended down 9 bps at 7.30 per cent, while the one-year rate closed 4 bps lower at 7.43 per cent.
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