India bonds seen extending losses before debt sale as US yields weigh

Mumbai: India's government bonds may face losses at the beginning of the third quarter on Thursday, as US Treasury yields remain high and cloud the outlook before the Reserve Bank of India’s policy decision. The looming debt sale adds to supply pressure, driving down prices. Global bonds suffered their worst month in years on Wednesday, with the benchmark 10-year US Treasury yielding its largest monthly increase since 2022.

The Indian 6.94% 2036 bond yield could trade between 7.18% and 7.26%, according to a private-bank trader. It closed at 7.1879% on Wednesday, marking a two-and-a-half-year high after jumping 24 basis points in September and nearly 44 basis points over the quarter. The US benchmark rose 7 basis points overnight and hovered at its highest level since 2007 at 5.30% in Asian trade.

Analysts predict the Indian 10-year yield may settle at 7.20% at the opening bell, with relief from lower oil prices potentially sparking short-covering and limiting the rally. Brent crude futures dropped 5.6% in Asian trade to $97.7/barrel, easing inflationary pressures for India, which imports vast quantities of the commodity.

India's debt market is closed for a holiday on Friday. A private bank trader cautioned against making decisions ahead of the long weekend and the Reserve Bank of India’s policy announcement, which is due on October 7. A weak auction or further hikes in US yields could push the benchmark toward 7.25%. Traders are keenly watching for clues on the RBI's rate direction, as opinions on a Federal Reserve interest rate increase next month softened after fresh government data showed that inflation eased more than expected in August.