India 10-year yield hits Dec 2023 peak as US debt rout, oil spike hurt

Mumbai witnessed a significant surge in Indian government bond prices on Thursday, as an intensifying US debt rout and soaring oil prices compounded the recent Reserve Bank of India's (RBI) first rate hike since February 2023. Crude oil prices jumped 5% to surpass $105/barrel in Asian trade, while the 10-year US Treasury yield climbed over 6 basis points to 5.34%, nearing levels last observed in 2002.

India's benchmark 6.94% 2036 bond yield also rose 4.5 basis points to 7.2869%, marking its highest close in nearly three years.

Oil prices experienced a sharp spike due to persistent concerns over Middle East supplies, following heightened attacks on shipping in the Gulf and Strait of Hormuz. Additionally, a hurricane threatened US offshore output. The costlier crude has impacted the global inflation outlook, complicating policymakers' decisions regarding future rate movements.

On Wednesday, the RBI increased its policy rate by 25 basis points to 5.50%, shifting to a "calibrated tightening" stance, which suggested that its subsequent move would either involve a hike or a pause. Analysts at Standard Chartered Bank expressed caution, stating that they would refrain from adopting a more constructive outlook on Indian government bonds for now.

They now anticipate the benchmark 10-year India Government Bond (IGB) yield to peak at 7.40% by Q3-FY27, up from 6.80% previously. Traders also remain apprehensive about further liquidity absorption by the central bank, the heavy state-borrowing calendar, and the duration-rich central government supply, all of which weigh on demand.

Overnight indexed swap rates in India surged, with the one-year OIS rate rising 2.5 basis points to 6.2750%, the two-year rate gaining 2.25 basis points to 6.4750%, and the liquid five-year rate jumping 4.5 basis points to 6.77%.