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

Indian government bonds were pummelled by an intensifying US debt rout and surging oil prices on Thursday, which compounded pain from the Reserve Bank of India's first rate hike since December 2023 the previous day.

Crude oil prices climbed 5% to over $105/barrel in Asian trade while the 10-year US Treasury yield rose more than 6 basis points to 5.34%, near levels last seen in 2002.

India's benchmark 6.94% 2036 bond yield climbed 4.5 basis points to 7.2869%, its highest close in almost three years. After surpassing the crucial 7.25% level, the move triggered stop-loss trades, traders said.

Bonds Corner Powered By India's 10-year yield hits Dec 2023 peak as US debt rout, oil spike hurt

The Indian government bond market is feeling the heat from escalating US Treasury yields and climbing oil prices. Crude oil has surged, fueled by ongoing fears regarding supply disruptions in the Middle East. In light of this, the Reserve Bank of India has raised its policy rate, signaling a potential tightening of fiscal measures. As a result, forecasts suggest the benchmark 10-year bond yield could hit 7.40%.

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Oil prices spiked on persistent concerns over Middle East supplies, following increased attacks on shipping in the Gulf and Strait of Hormuz, while a hurricane threatened US offshore output. Costlier crude has clouded the global inflation outlook, and complicated policymakers' choices over future rate moves.

On Wednesday, the RBI raised its policy rate by 25 basis points to 5.50% and shifted to a "calibrated tightening" stance, signalling that its next move would either be a hike or a pause.

"Given that the MPC has only just begun its hiking cycle and the risk of core rates moving higher, we refrain from adopting a more constructive outlook on Indian government bonds for now," analysts at Standard Chartered Bank said in a note.

"We now expect the benchmark 10Y IGB yield to peak at 7.40% by Q3-FY27 (from 6.80% previously)."

Traders also remain wary of further liquidity absorption by the central bank, a heavy state-borrowing calendar and duration-rich central government supply, all weighing on demand.

RATES

India's overnight indexed swap rates surged as traders sold off debt in US and local markets.

The one-year OIS rate rose 2.5 bps to 6.2750%, the two-year rate gained 2.25 bps to 6.4750%, and the liquid five-year rate jumped 4.5 bps to 6.77%.
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