Indian federal bond yields rose to 26-month highs on Monday amid low volumes as domestic concerns on tight liquidity dented market sentiment, even though weak U.S. cues supported buying bonds.
U.S. Treasuries gained in Asia on Monday, drawing momentum from a weaker-than-expected U.S. jobs data released last Friday after comments by the Federal Reserve Chairman Ben Bernanke that more bond buys were possible.
"(U.S. cues) help, but I think domestic factors will eventually dominate," said Ananth Narayan G., head of fixed income, currencies, commodities - south Asia at Standard Chartered Bank in Mumbai.
"Domestic data has been strong, oil and commodity prices are higher, structural liquidity shortfall seems in place, advance tax is around the corner, CD (certificate of deposit) rates are looking way high - all in all, (I) think bonds will be under pressure."
At 10:21 a.m. (0451 GMT), the benchmark 10-year bond yield was up 3 basis points at 8.21 percent, its highest since Oct. 3, 2008.
The benchmark 10-year bond yield is up 14 basis points so far in December after having dropped 4 basis points in November.
The 7.99 percent, 2017 bond was at 8.08 percent, up 4 basis points from last Friday.
The benchmark five-year swap was up 2 basis points at 7.40 percent. The one-year overnight indexed swap was down 1 basis point at 6.82 percent.
Cash has remained tight with banks borrowing around 1 trillion rupees daily from the central bank's repo auctions since the beginning of November, following withdrawals by depositors for festivals and due to sluggish government spending.
Expectations for a cut in the cash reserve ratio (CRR), the level of deposits that commercial banks must keep with the central bank, were dashed after a deputy governor said last week that CRR was not a tool to manage liquidity.
Dealers said actual buying of Indian debt by foreigners could support the demand for bonds.
"Overseas pension funds and insurance companies would like to see emerging market and India assets in their portfolio. They would be long-term players, and 8-percent plus on 7-year does look like a good India asset story," StanChart's Narayan said.
India's capital markets regulator auctioned the long-awaited enhanced foreign investment debt limit last Thursday. The new limits for government bonds were fully subscribed while that of corporate bonds was only part covered.