India bonds could face headwinds from RBI debt sale, elevated Treasury yields

MUMBAI: Indian government bond traders may attempt to lift prices at the beginning of the week following a drop in oil prices, but a debt market sale and higher Treasury yields could hinder the upward movement. The benchmark 6.94% 2036 bond yield is expected to fluctuate between 7.05% and 7.09% on Monday, according to a trader from a primary dealership.

It closed at 7.0686% in the prior session. The yield has surged 31 basis points over the past five weeks. Oil prices softened in Asian markets as investors monitored a potential recovery in shipments from Saudi Arabia, despite escalating tensions between Yemen's Houthis and the United States and Iran. The benchmark Brent crude contract fell 2.3% to $101.50 per barrel on Monday, after peaking near $110 last week.

"Oil may offer minimal support, but a significant drop below $100 per barrel is required for the 10-year yield to approach the 7% level," the trader noted. The Reserve Bank of India plans to sell bonds worth 250 billion rupees ($2.61 billion) via an open market sale, marking its second such operation in a series aimed at reducing liquidity in the banking sector.

Last week, the central bank absorbed liquidity equivalent to nearly 0.2% of total bank deposits, its first debt sale operation in nine years, totaling 500 billion rupees. Speculation about rate hikes in India has intensified following the Federal Reserve's actions, with many anticipating the RBI to raise the repo rate by 25 basis points on October 7.

The 10-year US Treasury yield has remained relatively stable around 5%, following the Fed's indication of another rate hike before year-end.