By V. Ramakrishnan March 5 (Bloomberg) -- India’s 10-year bonds fell, pushing yields to the highest level in 17 months, on concern inflation will accelerate and prompt investors to cut holdings of fixed- income securities. Yields climbed to a level not seen since October 2008 after truckers increased freight rates by as much as 15 percent yesterday following an increase in state-set fuel prices. India’s manufacturing output rose the most in 1 1/2 years in February, according to a report released by HSBC Holdings Plc and Markit Economics’ Purchasing Managers’ Index on March 1. “Demand is growing at a fast pace in the economy and manufacturers will pass through their costs to consumers, which will push up bond yields,” said Krishnamurthy Harihar, Mumbai- based treasurer at the Indian unit of FirstRand Ltd., South Africa’s second-largest financial services company. The yield on the 6.35 percent note due January 2020 advanced one basis point to 7.96 percent as of 10:20 a.m. in Mumbai, according to the central bank’s trading system. The price dropped 0.08, or 8 paise per 100 rupee face amount, to 89.18. Harihar predicts inflation will quicken to beyond 10 percent by early April and the 10-year yield will touch 8.50 percent by June. Food prices rose 17.87 percent in the week ended Feb. 20, following a 17.58 percent gain the previous week, commerce ministry data yesterday showed. HSBC Holdings Plc and Markit Economics’ Purchasing Managers’ Index rose to 58.5 in February from 57.6 in January. Record Debt Sales FirstRand’s Harihar said bond investors will also be focusing on the schedule for record debt auctions for the fiscal year that starts April. “From a liquidity perspective, the next critical factor will be the bond auction calendar.” Finance Minister Pranab Mukherjee said in his budget speech on Feb. 26 that India will borrow 4.57 trillion rupees ($99.8 billion), an increase from last year’s all-time high. The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, was little changed. The rate, a fixed payment made to receive floating rates, was at 7.04 percent. To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

Source