India bonds slip as Treasury rout offsets oil slide

The benchmark 10-year US Treasury yield jumped more than 12 basis points to 4.9830% in Asian trade after October inflation exceeded forecasts and policymakers signalled a potentially faster pace of rate hikes.

Higher US yields erode the premium offered by riskier Indian bonds, reducing its appeal to foreign investors.

Indian government bonds declined on Wednesday as a sharp rise in US Treasury yields, triggered by hotter-than-expected inflation and hawkish signals from policymakers, overshadowed relief from lower crude oil prices. Higher US yields could erode the relative return advantage of Indian debt, dampening its appeal among foreign investors.

The benchmark 6.94% 2036 bond yield rose around 5 basis points from Monday's close to 7.2005% by 10:40 a.m. IST. Markets were shut on Tuesday for a holiday.

Traders also sold the 10-year bond ahead of Friday's 340 billion rupee ($3.62 billion) auction, which will add substantial supply.

Brent crude fell $6 over three sessions to $92.4 a barrel after US officials downplayed further military action against Iran. It edged higher on Wednesday after sliding to a two-month low of $91.41 in the previous session.

While cheaper oil eases India's inflation and fiscal pressures, investors fear growing odds of a December Fed rate hike could also push the Reserve Bank of India to tighten policy.

"With US CPI affirming possibility of a Fed rate hike in December, it raises the probability of RBI also raising rates in the upcoming policy," a private-bank trader said.

"The 10-year yield may trade in 7.10% to 7.25% range till the next RBI policy."

Traders will now watch India's October inflation data due Thursday. A Reuters poll forecasts annual inflation at 5.93%, up from 5.54% in September.

RATES

The one-year, two-year and five-year rates gained 7-8 bps to 6.38%, 6.3850% and 6.48%, respectively.

($1 = 93.9275 Indian rupees)