Indian 10-year bond hits 4-month low on US debt rout
The govt is set to sell ₹34,000 crore of the benchmark 10-year note later in the day, testing demand in a market already pressured by policy-tightening expectations, oil-driven inflation and rising global yields.
Indian government bonds experienced a sharp decline on Friday, on track for a sixth consecutive weekly drop, with the benchmark 10-year yield reaching a four-month high. This decline was triggered by a significant sell-off in U.S. Treasuries, which negatively impacted market sentiment before a substantial debt auction in New Delhi.
The Indian government planned to sell ₹34,000 crore of the benchmark 10-year note later in the day, facing challenges in a market already pressured by expectations of policy tightening, oil-driven inflation, and rising global yields. The 6.94% 2036 bond yield peaked at 7.1391% early in the trading session, marking its highest level since May 20 after closing at 7.1067% the previous day.
The yield had risen by approximately 7 basis points this week, following an increase of over 30 basis points over the preceding five weeks. Globally, the debt crisis deepened, with the U.S. 10-year Treasury yield surpassing 5.20%, its highest level since 2007. Japan's 10-year yield climbed to 3.115%, a level last observed in August 1996, while Germany's 10-year yield, a benchmark for the euro zone, hit a 17-year high of 3.5798%.
Brent crude prices hovered near $105 a barrel, raising inflation concerns for oil-importing India, and market participants considered the likelihood of a potential US-Iran truce. Recent factors such as India's August retail inflation surging to 4.82% and a Federal Reserve rate hike earlier in the month have led most market participants to anticipate an RBI rate hike on October 7, with a senior state-run bank official stating that it would be a surprise if the hike did not occur.
The RBI is actively reducing surplus liquidity through open market sales, variable rate reverse repos, and FX swaps as it prepares the market for stricter policies. Analysts predict further operations by Deutsche Bank, while a 50 basis point Cash Reserve Ratio increase remains a last-resort option. Overnight indexed swap rates fluctuated, already heavily positioned for rate hikes, limiting upside and attracting interest.
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