Indian government bonds experienced their best week in 11 weeks as the benchmark 10-year bond yield dropped 5 basis points to 7.3837%, marking its biggest fall since July. According to The Hindu BusinessLine, the yield has eased over 9 basis points so far this week, after gaining more than 70 basis points in the previous 10 straight weeks - a streak not seen since at least 1998. The 6.94% 2036 bond yield traded slightly below Thursday's levels at 7.3837%, with bond prices rising when yields fall. This significant decline followed a favorable boost from Treasuries and decreasing crude prices, prompting short covering in the market. The move gathered pace after the 10-year US Treasury yield slid 4.5 basis points to 5.00% in Asian hours, easing the global borrowing-cost backdrop and providing relief to Indian debt markets. US Treasury yields eased after comments from the Federal Reserve on the future rate path were interpreted by markets as signalling a less hawkish stance from policymakers, as reported by The Economic Times.
Indian government bonds attracted unprecedented investor interest this week, with mutual funds emerging as the biggest value buyers, lapping up about ₹40 billion of bonds this week through Thursday according to The Hindu BusinessLine. Investors lapped up Indian bonds after the 10-year yield twice approached but did not breach the pivotal upside level of 7.50%, making prices attractive for entry. Sachin Bajaj, chief investment officer at Axis Max Life Insurance, stated that "we think the 7.50% level is an attractive entry point for the medium term," acknowledging that the yield could rise above 7.50% in the current cycle, putting its near-term trading range at 7.25%-7.75%. VRC Reddy, treasury head at Karur Vysya Bank, said the bank would look to build positions once yields cross 7.50%, with further buying likely if they rise towards 7.60%. Rahul Bhuskute, chief investment officer at Bharti AXA Life Insurance, echoed that view, saying yields of 7.50% and above were attractive and the insurer would look to build positions opportunistically in tranches. Forecasts suggest bond yields may rise to 7.70% to 7.75% by December, with Axis Bank having forecasted a yield of 8% by June 2027.
The latest rally in Treasuries and softer oil prices provided substantial support to Indian government bonds, with the Federal Reserve's less hawkish pause also helping the market. The Fed held rates steady in October with fewer hawkish dissents than expected, and Chair Kevin Warsh struck a less hawkish tone than markets had anticipated, leading markets to pare expectations for further US tightening. According to The Hindu BusinessLine, US midterm elections will be the next key focus, with traders noting that their impact on war-related decisions and oil prices could have a bearing on debt markets across the globe. Kruti Chheta, fund manager at Mirae Asset Mutual Fund, said "If democrats are able to take over both the houses there will be some rally in the market, but if it's a divided reaction, markets may remain subdued." The rupee remained almost unchanged, closing at 95.26 due to several market factors. Demand at New Delhi's ₹330 billion rupee ($3.47 billion) bond sale on Friday will be key in sustaining this rally, as noted by a private bank trader.
The latest oil price surge stems from supply disruption concerns following an attack on Saudi Arabia's biggest refinery, as reported by The Economic Times. Oil prices declined to $113 per barrel, from $116 a day earlier, providing significant relief to Indian bond markets. The latest rally in Treasuries and softer oil prices provided substantial support to Indian government bonds, with the Federal Reserve's less hawkish pause also helping the market. A trader at a primary dealership noted that "moves have become highly correlated to crude," adding that even a slight drop in prices can recover the market mood. The overnight indexed swap curve flattened this week, with the one-year OIS flat at 6.68%, the two-year OIS fell 1.25 bps to 6.72%, and the five-year fell 2.75 bps to 6.8375% according to The Hindu BusinessLine.
India's overnight indexed swap rates showed mixed movements, with the one-year OIS flat at 6.68%, the two-year OIS fell 1.25 bps to 6.72%, while the five-year fell 2.75 bps to 6.8375% according to The Hindu BusinessLine. This compares to Wednesday's data showing the one-year OIS rising 4.5 bps to 6.68%, pricing in 100-125 bps of rate hikes over the next 12 months. The overnight indexed swap curve flattened this week as short-term rates surged faster amid tightening liquidity. Rahul Bhuskute, chief investment officer at Bharti AXA Life Insurance, expects a terminal repo rate of 6.00%-6.25%, below what the swap market is pricing in, stating "we see fair value for the 10-year bond yield in the 7.15%-7.45% range over the next 6-12 months." While inflation risks are likely to persist over the next year, a large part of that is already reflected in prices, Bhuskute noted. India's swaps market is factoring in 125 basis points of policy rate hikes over the next 12 months, which some investors consider excessive.
