Bond yields dip on likely short covering after new 10-year note news

<html xmlns=""><head><title>INDIA BONDS-Bond yields dip on likely short covering after new 10-year note news</title></head><body>

By Dharamraj Dhutia

MUMBAI, Jan 31 (Reuters) -Indian government bond yields were lower in early session on Tuesday, as traders likely covered short positions after the government's plan to launch a new 10-year paper offset the impact of heavy supply from states later in the day.

Major focus still remained on the economic survey later in the day and the federal budget announcement on Wednesday.

The benchmark 10-year yield IN072632G=CC was at 7.3741% as of 10:00 a.m. IST, after closing at 7.4004% on Monday, posting its third consecutive rise.

Apart from the sale of the new 10-year paper this week, the level of 7.40% is seen as a strong resistance leading to reversal, a trader with a state-run bank said.

New Delhi will sell 120 billion rupees ($1.47 billion) of a new 10-year bond on Friday.

Reuters had reported on the launch of the new paper with the existing 10-year bond having reached its unofficial upper limit of issuance.

Meanwhile, Indian states aim to raise 258.05 billion rupees through the sale of bonds, the second consecutive week where the quantum has risen above 250 billion rupee mark.

The heavy supply comes a day before the announcement of the Union budget, where the government is likely to keep its gross market borrowing below 16 trillion rupees for the next year as it does not want to destabilise the bond market with any negative surprises, two sources close to the deliberations said.

Bond market participants have lowered their position in longer-duration bonds, but remain invested in the shorter end of the curve on expectations of another year of elevated government borrowings, investors and traders said.

"Looking at the current levels, it seems the markets are light, especially on the long end, and are expecting a heavy borrowing calendar," said Vijay Sharma, senior executive vice president at PNB Gilts.

($1 = 81.6150 Indian rupees)

Reporting by Dharamraj Dhutia; Editing by Sohini Goswami


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