Key Takeaways
- Indian 10-year government bond yields reached their highest level in nearly three years.
- The surge was driven by the US debt crisis and rising oil prices.
- The Reserve Bank of India raised its policy rate, but analysts remain cautious about the bond market outlook.
Indian government bonds faced significant pressure on Thursday, with their yields reaching their highest level in nearly three years. The benchmark 6.94% 2036 bond yield climbed to 7.2869%, surpassing the crucial 7.25% level and triggering stop-loss trades among traders.
The rise in bond yields was largely attributed to the intensifying US debt crisis and surging oil prices. Crude oil prices spiked by 5% to over $105 per 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.
These market conditions compounded the pain from the Reserve Bank of India’s first rate hike since February 2023, which raised its policy rate by 25 basis points to 5.50% and shifted to a ‘calibrated tightening’ stance. Analysts at Standard Chartered Bank warned that the benchmark 10-year Indian government bond (IGB) yield could peak at 7.40% by Q3-FY27.
Traders expressed concern over further liquidity absorption by the central bank, a heavy state-borrowing calendar, and a duration-rich central government supply, all of which are expected to weigh on demand. The overnight indexed swap rates also 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%.
Oil prices spiked due to persistent concerns over Middle East supplies, following increased attacks on shipping in the Gulf and the Strait of Hormuz, and a hurricane threatening US offshore output. These factors have clouded the global inflation outlook and complicated policymakers’ choices over future rate moves.
Analysts at Standard Chartered Bank stated, '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.'
The Reserve Bank of India’s decision to adopt a ‘calibrated tightening’ stance suggests that its next move could be either a hike or a pause, depending on economic conditions. Traders remain wary of further liquidity absorption by the central bank, a heavy state-borrowing calendar, and a duration-rich central government supply, all of which are expected to weigh on demand.
In a statement, analysts at Standard Chartered Bank said, 'We now expect the benchmark 10Y IGB yield to peak at 7.40% by Q3-FY27 (from 6.80% previously).'
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, Financial analysts
