Local bonds tracked a rise in global yields, including the 10-year US Treasury yield briefly topping a 24-year peak. It was last at 5.30%, bringing the spread between it and the Indian benchmark to the tightest in more than a year.
The Indian benchmark 10-year yield rose 3 bps to 7.2133% on Thursday, the highest since April 2024. It rose nearly 10 bps this week, its worst since mid-August.
Bonds Corner Powered By Global bond rout hoists benchmark Indian yield to mid-2024 high before RBI policy
A significant selloff in Indian government bonds occurred as global yields rose and inflation pressures heightened. The Indian benchmark 10-year yield reached its highest level since April 2024. Traders expect the Reserve Bank of India to announce a rate hike at its upcoming policy meeting next week. Additionally, concerns regarding excessive liquidity in the banking system have intensified amid upcoming bond issues.
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That comes with a backdrop of inflation picking up, rising rates globally and relatively loose domestic monetary conditions, partly due to surplus liquidity from one-off policy driven FX flows.
"RBI may have to considerably tighten monetary policy in the months ahead, with next week's meeting being live, and deploy measures to absorb excess liquidity," said Sreejith Balasubramanian, senior economist at Bandhan Mutual Fund.
SUPPLY PRESSURES PERSIST
Bonds were also battered by supply fears after New Delhi raised the issuance of long-term bonds in its borrowing plan for the second half of the fiscal year and the central bank sold the most bonds through open market operations in a decade to narrow a record cash surplus.
Traders are also bracing for a deluge of state government debt, with the market expecting 3.25-3.5 trillion of bond issues between October-December.
To tamp down on excess liquidity in the banking system, traders are worried RBI may announce more open market sales at next week's policy.
"OMO sales is a hanging sword, which will continue to keep pressure on yields," a private-bank trader said.
RATES
India's overnight indexed swaps surged, tracking global yields.
The one-year overnight indexed swap rate rose 6.75 bps to 6.2650%, two-year rate jumped 7.5 bps to 6.48% while the 5-year added 8.25bps to 6.73%.
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