Indian government bonds experienced a notable decline on Friday, with the benchmark 6.94% 2036 bond yield ending at 6.7799%, up from Thursday's close of 6.7478%. The yield posted its biggest weekly rise in eight weeks, rising 6.5 basis points this week after staying range-bound last week and declining in the previous six sessions. According to The Economic Times, the benchmark 6.94% 2036 bond yield traded rangebound at 6.7519% as of 10:10 a.m. IST, compared with Thursday's close of 6.7478%. New Delhi will raise $3.32 billion through a bond sale, which includes the three-year and 30-year papers, with traders expecting a quiet end to the week and do not foresee any major surprises at the auction. Rates are expected to consolidate amid few triggers to drive a strong move either side, with the 1-year rate ending at 5.89% on Thursday, while the 2-year rate closed at 6.0650% and the 5-year rate settled lower at 6.3375%. Bond yields move inversely to prices, with the 10-year yield having slipped nearly 5 basis points over the last two sessions.
Brent crude spiked this week, with the benchmark contract climbing significantly as reported by The Economic Times. In West Asia, the U.S. and Iran stepped up attacks across the Gulf, with their broken truce fraying into daily attacks in the Middle East, limiting oil flows through the Strait of Hormuz and Tehran asking the Houthi movement to stand ready to shut the Red Sea export route. This continued price volatility has significantly impacted Indian government bonds, with traders cutting holdings in a risk-off move on Friday as crude climbed further, and in the absence of news on index inclusion, the selling could continue next week, according to a trader at a primary dealership. "For bonds, crude remains the key variable because of its impact on fiscal deficit and government subsidies," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank. India, the world's third-largest oil importer and consumer, remains highly exposed to swings in crude prices, but the current price volatility has increased immediate inflationary pressures and heightened macroeconomic concerns.
Foreign investors have significantly increased their commitment to Indian government bonds, with overseas investors buying about ₹16.5 billion of bonds under the fully accessible route from Monday to Thursday amid expectations of possible inclusion in Bloomberg's index, according to The Economic Times. This represents a substantial increase from the previous ₹1.3 billion sold on Monday, marking their first sale since India announced policy measures in June to backstop the rupee. Foreign portfolio investor flows into Indian debt remained positive, with more than $900 million coming in during the first 10 days of July. Bets that Indian debt would be included in Bloomberg's Global Aggregate Index cushioned market sentiment, with foreign investors having poured nearly $6.5 billion into Indian government bonds since June. FAR-eligible Indian government bonds are already part of three emerging-market bond indices and the Bloomberg inclusion would mark their first entry into a global investment-grade debt benchmark. Market has shown firm demand for Indian government bonds despite a softer backdrop this week marked by higher-than-expected CPI, renewed escalation in the U.S.-Iran conflict, and rupee weakness, economists at DBS noted in a report.
Globally, the 10-year U.S. Treasury yield stayed close to 4.55% on curbed expectations of aggressive Federal Reserve rate hikes, as reported by The Economic Times. Interest rate futures are now showing a less than 50% probability of a rate hike in September, down from a three in four chance at the start of the week. U.S. producer prices unexpectedly declined 0.3% last month, against expectations for no change, prompting investors to pare Fed rate-hike bets significantly. Fears of higher U.S. rates also weighed on emerging-market bonds earlier in the week, though softer U.S. inflation and PPI data helped scale back rate-hike bets. This helped preserve the yield advantage of EM local-currency bonds, HSBC said in a note. Indian bond yields eased as steady oil prices lifted broader market sentiment, with the market tracking overnight drops in U.S. Treasury yields after softer economic data reduced expectations of Federal Reserve rate hikes. The 10-year Treasury yield was steady around 4.55% after a string of softer economic data in the world's largest economy eased chances of aggressive rate hikes by the Federal Reserve.
Banking system liquidity tightened, with short-term interest rates rising as a result, according to The Economic Times. Three-month bank certificates of deposit were quoted around 6.70%, after having touched a low of 6.30%. The rupee ended the week at 95.32 against the US dollar, compared with 94.66 at the end of June, as reported by The Economic Times. The strength in the US Dollar Index could be one of the factors behind the currency's weakness, according to Pal. Foreign participation has also picked up, which should support the auction and keep primary-market demand healthy, economists at DBS said in their note. India's overnight index swap rates rose as traders pared risk before the weekend, with the one-year rate up 3.25 bps at 5.9275%, the two-year rising 1.75 bps to 6.0850%, and the five-year climbing 3.75 bps to 6.3775%.
