Government bond yields increased on Tuesday following central bank bond sales, with the benchmark 10-year bond yield rising seven basis points to 7.07%, according to The Economic Times. The ten-year US Treasury yield moved above 5.02%, with pressure on yields expected to continue ahead of the US Federal Open Market Committee meeting. This represents a further increase from the previous week's surge, when the benchmark 10-year bond yield crossed the 7% threshold on Friday, climbing five basis points from the previous close of 6.97%. The five-year bond led the selloff, with its yield up 10 bps on the day at 6.6202%, while the 10-year US Treasury yield rose to multi-year highs at 4.95%. According to Mint, the benchmark yield has increased by 6 basis points this week, marking its fourth consecutive weekly decline in bond prices.
Retail inflation reached a twenty-month high, fueling rate hike expectations as early as next month, as reported by The Economic Times. This development has intensified pressure on government bonds, with the RBI accepting bids worth only ₹4,505 crore for the 6.20% 2029 bond, just about 40% of the notified amount of ₹11,000 crore, with the cut-off yield at 6.40%. The RBI also partially cancelled an auction of shorter-dated government bonds for the first time in a year, signalling concern over rising borrowing costs. In what market participants are seeing as an early indication from Indian authorities on interest rates, the Central bank Reserve Bank of India (RBI) partially cancelled an auction of shorter duration government security to curb any further spike in bond yields, as reported by The Hindu. The three-year or 6.20% 2029 bond yield was dealt at 6.4566%, up 25 basis points in last four weeks since it was issued, with overnight indexed swap rates surging along with bond yields, with traders saying markets were increasingly pricing in an RBI rate hike as early as October.
Foreign portfolio investors pulled out over ₹5,109 crore from Indian government securities, driven by global uncertainties and a declining rupee, alongside soaring crude oil prices and increasing US Treasury yields, according to The Economic Times. Such conditions rendered Indian sovereign debt less appealing, prompting capital flight from emerging markets, notably India. The banking system remains flush with liquidity, driven by inflows under the FCNR(B) scheme, with the daily average surplus in September so far is ₹10.25 lakh crore, compared to ₹3.67 lakh crore in August and ₹1.07 lakh crore in July. As per Alok Singh, head of treasury at CSB Bank, "Bond yields typically move in tandem with oil prices. Currently, the rise in yields is being capped due to excess liquidity in the banking system." However, market participants expect yields to increase going ahead, as the banking system's liquidity surplus may be masking underlying bearish sentiment in the bond market.
The bond market decline was driven by rising oil prices, with Brent crude oil futures trading around $105 per barrel on Friday. As reported by The Economic Times, Brent crude oil neared $110 a barrel in Asian trade, before easing to around $103, with prices gaining more than 7.5% this week as attacks on key Middle East shipping routes raised fears of prolonged supply disruptions. The oil rally rattled global debt markets, driving the U.S. 10-year Treasury yield toward 5% as investors repriced inflation risks and the likelihood of a near-term U.S. rate hike. According to latest reports, oil prices rose more than 4% on Thursday to an almost four-month high above $105 a barrel, adding to investor concern about a more sustained pickup in inflation. The 10-year Treasury yield has now hit levels not seen since late 2023, after the Federal Reserve cranked its key interest rate higher to get super-high inflation coming out of the COVID-19 pandemic under better control.
Despite global yield pressures, Indian debt has outperformed most global peers since the US war on Iran began in February, supported by central bank measures to attract dollar inflows. According to Mint, India's bond market is increasingly being driven by the country's growth and inflation outlook, fiscal deficit trajectory and other domestic economic factors. Manish Banthia, chief investment officer for fixed income at ICICI Prudential AMC, noted that elevated global yields do not necessarily mean Indian bond yields will move higher in tandem, as India's bond market is becoming less dependent on US and other global yields. The historical correlation between dollar yields and emerging-market bond yields has weakening significantly, suggesting domestic fundamentals are taking precedence over international factors. However, market participants expect yields to increase going ahead, as the banking system's liquidity surplus may be masking underlying bearish sentiment in the bond market.
