By Anoop Agrawal and Anil Varma April 9 (Bloomberg) -- India's 10-year bonds fell the most since August after the government sold the securities at a higher yield than estimated by investors, spurring speculation demand is weakening. The South Asian nation auctioned 50 billion rupees ($1.1 billion) of 6.35 percent notes due 2020 at a maximum yield of 7.9645 percent. The median forecast of traders for the so-called cut-off yield in a Bloomberg News survey was for 7.90 percent. Primary dealers, companies that underwrite federal debt sales, bought 4.5 billion rupees of unsold 10-year bonds at the auction. "Bonds have fallen significantly because the cut-off yield on the 10-year bond came in higher than the market expected," said Srinivasa Raghavan, head of fixed-income trading at IDBI Gilts in Mumbai. "That's reinforcing the concern that interest rates are going to rise in the near term." The yield on the 6.35 percent note due January 2020 rose 15 basis points, or 0.15 percentage point, to 8.01 percent as of the 5:30 p.m. close in Mumbai, according to the central bank's trading system. That's the highest level since March 22. The price fell 0.91, or 91 paise per 100 rupee face amount, to 88.92. The government raised a total 120 billion rupees selling bonds maturing in 2012, 2020 and 2027 as planned at the first debt auction of the fiscal year that began April 1. 'Supply Pressure' In addition to the sale of 10-year notes, the South Asian nation also auctioned 50 billion rupees of 6.85 percent, two- year notes at a yield of 5.9803 percent and 20 billion rupees of the 8.26 percent bond maturing in 2027 at 8.2908 percent, the Reserve Bank of India said in a faxed statement in Mumbai. Traders expected India to sell the 2012 bonds at 6.09 percent and the 2027 securities at 8.32 percent. Prime Minister Manmohan Singh's government plans to complete by Sept. 30 as much as 63 percent of its record full- year borrowing target of 4.57 trillion rupees. India aims to auction at least 110 billion rupees of securities every week till July 16, according to its schedule of debt sales released on March 29. It is also due to sell at least 70 billion rupees of treasury bills every week between April and June. "The supply pressure is high and is difficult for investors to accommodate," said S. Srikumar, chief of fixed- income at state-owned Corporation Bank in Mumbai. "The scope for making gains is bleak as the near-term trend for the yields will be to rise." The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, added eight basis points this week. The rate, a fixed payment made to receive floating rates, was at 6.96 percent.

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