India 10-year bond yield reverses half of last week's drop on elevated inflation

The benchmark 6.94% 2036 bond yield ended at 7.3079%, up from 7.2467% on Thursday. The yield rose 12 basis points this week after plunging 22 bps last week.

Indian bonds have surrendered over half of last week's exceptional gains as investors reassess the interest-rate outlook, said Umesh Tulsyan, managing director at Sovereign Global Markets.

Indian government bonds fell for a third consecutive session, driven by inflation and interest-rate outlook concerns. The benchmark yield increased to 7.3079%, reversing much of last week's gains. Retail inflation in India accelerated, surpassing the Reserve Bank of India's target range, which raises rate hike expectations. In the US, rising Treasury yields and inflation data led to altered rate hike projections.

"The reversal has been driven by a combination of higher US Treasury yields, stronger than expected US and domestic inflation, renewed geopolitical uncertainty and caution ahead of the large government bond auction."

Earlier in the day, the central government sold 340 billion rupees ($3.61 billion) of the benchmark paper, which took its outstanding issuance to a record 2.72 trillion rupees, highest for any paper.

The 10-year Treasury yield was around 5.12%, up 26 bps for this week and on the verge of posting its biggest jump in seven months.

Yields have been trending upwards, after stronger-than-expected October consumer price data prompted markets to increase bets that the Federal Reserve could opt for a larger-than-usual 25 bps rate hike on December 9.

Traders are now pricing in a 14% chance of a 50-basis-point move, up from zero a week earlier.

In India, the backdrop has also turned less favourable, as retail inflation accelerated to 6.09% in October from 5.54% in September, surpassing the upper tolerance band of RBI's target, and reinforced expectations that it will deliver another rate hike in December.

Overnight index swap rates also rose through the week tracking local and US bond yields, giving up almost half of their last week's drop.

The one-year rate ended at 6.50%, while the two-year rate ended at 6.51%, and the five-year rate settled at 6.61%. Swap rates rose by around 13-17 bps for the week.