India's 10-year bond yield surpasses 7% on rising oil, Treasury yields

Indian government bonds took a nosedive in early trade on Friday, with the benchmark 10-year yield surpassing the 7% threshold for the first time in over three months. This surge in yields was driven by a combination of rising oil prices and increased US yields, causing investors to sell their bonds. The 6.94% 2036 bond yield climbed to 7.0226%, its highest level in over three months, after closing at 6.9762% the previous day.

This is not just an India-specific issue; a global bond market turmoil is unfolding, with interest rates set to rise across major economies in the coming weeks. US yields continued their upward trend in Asian trading hours, after data indicated a higher likelihood of a Federal Reserve interest rate hike next week. The US 10-year Treasury yield edged closer to the 5.00% mark, which would be its highest in nearly three years.

Germany's 10-year yield reached a level not seen in over 15 years, while Japan's equivalent bond yield surged to levels last observed in September 1996. Oil prices breached the $100 per barrel mark, with Brent crude trading at $108, as a persistent Middle East conflict and energy supply disruptions fueled global fuel costs. India, being the world's third-largest oil importer, faces the challenge of higher import costs and further inflationary pressures.

Overnight indexed swap rates rose in tandem with bond yields, with one-year rates at 6.08%, two-year rates at 6.30%, and five-year rates at 6.60%. Traders attribute the market's reaction to increasing expectations of a 25-basis-point Federal Reserve rate hike, with the probability now at 72%, up from 62% earlier.