Indian bonds breathe easy as Treasury yields decline

The benchmark 6.94% 2036 bond yield was down 2.5 basis points at 7.3714% at 11:40 a.m., after falling as much as 4 basis points at the open.

Bond yields move inversely to prices.

Early Thursday, bonds issued by the Indian government saw slight upswings, influenced by a rally in US Treasuries. Despite this, concerns over liquidity, climbing interest rates, and mounting supply challenges have capped these hikes. Traders are curbing risk levels prior to a major debt auction, while rising domestic inflation fuels anticipations of a tougher monetary approach from the Reserve Bank of India, as evidenced by the expanding India-U.S. yield spread.

The benchmark 10-year US Treasury yield, a barometer for global borrowing costs, dropped more than 8 basis points to 5.10% in Asian trade, after comments from Federal Reserve officials signalled little urgency to raise rates further.

Traders still continued trimming risk in the Indian debt market ahead of a large debt auction and the Reserve Bank of India's tighter cash-reserve-ratio maintenance requirements that take effect on Friday.

"The near-term direction of IGB yields remains skewed higher as the RBI continues to tackle inflation risks, excess liquidity and currency stability concerns," said Sherilyn Chew, multi-asset strategist at DBS Bank. "The policy and supply backdrop suggests yields could remain under upward pressure in the near term."

The latest selloff has widened India-U.S. yield spreads across the curve, defying the compression seen in other Asian markets. The India-U.S. 10-year spread expanded to 228 basis points on Thursday, its widest since July 1.

Rate-hike bets have also intensified as domestic inflation quickened and Brent crude held above $100 a barrel.

India's September consumer inflation accelerated to 5.54%, and a majority of economists expect it to breach the RBI's 6% tolerance ceiling in October.

RBI Governor Sanjay Malhotra signalled Tuesday that monetary policy and financial stability cannot be fully disentangled, reinforcing expectations of further tightening.

Rates

The one-year OIS rate rose 1.5 bps to 6.4450%, the two-year rate dropped 1.5 bps to 6.58%, and five-year rate eased 3.25 bps to 6.7675%.