India's key-tenor bonds may see relief after October-March supply cut

Indian government bond yields are anticipated to rise on Monday, mirroring an increase in US Treasury yields. However, a reduction in October-March supplies of liquid five-year and 10-year bonds could provide some relief following a significant sell-off in recent weeks. The benchmark 6.94% 2036 bond yield is projected to trade between 7.06% and 7.11% on Monday, as opposed to ending at 7.1194% on Friday.

Traders may find some comfort in the slight decrease in five-year and 10-year bond supplies, as these two segments experienced heavy losses over the past few sessions. The Indian government plans to raise ₹7.86 lakh crore ($82 billion) through bond sales between October and March, slightly below previous estimates. This will bring total borrowing for the year to ₹16 lakh crore, down from the projected ₹16.09 lakh crore after the first half and the ₹17.20 lakh crore outlined in the Budget.

The proportion of five-year and 10-year bonds in the borrowing portfolio has dropped to 12.1% and 26.3%, respectively, from 15.4% and 29% between April and September. The 10-year benchmark bond yield has increased by 36 basis points over the past six weeks, while the shorter-duration bond yield has surged 46 basis points during the same period.

US Treasury yields have remained elevated, with the 10-year yield near its highest level in nearly two decades, as recent data and remarks from Federal Reserve officials have fueled expectations of additional rate hikes. Currently, traders view a 64% likelihood of an additional rate hike in October and a 51% probability of further action in December, according to CME Group’s FedWatch Tool.

The Federal Reserve raised rates earlier this month, for the first time since 2023. Anticipations of a rate increase by the Reserve Bank of India have strengthened after retail inflation surged to 4.82% in August and following the US Fed's latest move, with the majority now expecting an increase next week. Overnight indexed swap rates are expected to remain within a narrow range after rising in the previous week.