India bonds track Treasury weakness ahead of debt supply

The 10-year US Treasury yield, a barometer for global borrowing costs, tested 5% in Asian trade as investors stepped up bets on a larger Federal Reserve rate increase in December.

Traders shrugged off a slight decline in oil prices to $92 per barrel as they awaited New Delhi's 340 billion rupee ($3.63 billion) auction of the 10-year note on Friday.

On Thursday morning, Indian government bonds remained stable, reflecting a pause after recent volatility. Market sentiment is influenced by declining oil prices and climbing US Treasury yields, with inflation data on the horizon. The Reserve Bank of India is expected to modify its policy rate in light of these figures. Meanwhile, the ongoing Iran conflict could affect oil pricing, as traders prepare for a significant bond auction set for Friday.

The benchmark 6.94% 2036 bond yield settled 3.5 basis points higher at 7.2467%, retreating from an intraday high of 7.2617%. The yield had logged its sharpest one-day jump in a month on Wednesday.

India's annual retail inflation accelerated to 6.09% in October from 5.54% in September, government data showed, slightly above the 5.93% market estimate.

Traders were relieved that inflation did not overshoot forecasts by much, but its breach of the Reserve Bank of India's 2% to 6% tolerance band cemented wagers that the central bank will raise rates again in December.

The RBI lifted rates in October for the first time in nearly four years and adopted a "calibrated tightening" stance. While a 25-basis-point increase is widely expected next month, some traders still see scope for a larger 50-basis-point move.

Attention now turns to the Middle East conflict and its impact on crude oil. Oil has retreated to about $92 per barrel from $117 ahead of the US midterm elections, offering some relief to oil-import-dependent India.

"There is some room for rates to ease if oil prices retrace further, although additional rate hikes on the horizon make a deeper correction unlikely," said Radhika Rao, senior economist at DBS Bank.

A renewed oil-price spike or a broader AI-led equity selloff could unsettle risk appetite, she added.

Overnight index swap rates edged higher, though the move was capped as inflation was only slightly above forecasts.

The 1-year, 2-year and 5-year OIS rates were up 4 to 5 basis points at 6.44%, 6.43% and 6.53%, respectively.