India 10-year yield hits over two-year high as supply angst adds to global woes

Indian government bonds fell sharply on Monday, pushing the benchmark 10-year yield to an over two-year high, as a shift towards longer-dated supply added to pain from local rate-hike risks and rising global yields.

The government will raise 7.86 trillion rupees ($82 billion) through bond sales in the October-March period, taking full-year gross borrowing to 16 trillion rupees.

Although overall borrowing was a tad lower than earlier projections, traders were rattled by a shift from in-demand five- and 10-year bonds towards 15-year and ultra-long debt.


The benchmark 6.94% 2036 bond yield rose 5 basis points from Friday's close to 7.1708% by noon, breaching the key 7.15% level and hitting its highest intraday level since May, 2024.

The increased duration supply lands in a market positioning for a rate hike by the Reserve Bank of India next week.

Expectations of a rate increase have strengthened after August retail inflation accelerated to 4.82% and following the U.S. Federal Reserve's latest move.

"With markets increasingly positioning for RBI tightening and the global policy backdrop remaining skewed towards further rate hikes, there remains scope for India rates spreads to narrow further," DBS Bank said in a note.

Global Cues Add Pressure

The 10-year U.S. Treasury yield climbed to 5.21% on Monday, its highest in nearly two decades, while Brent crude jumped 2.7% to $107.15 a barrel.

Higher U.S. yields set the tone for borrowing costs globally, raising the return investors demand from riskier emerging-market debt.

Higher oil prices also add to pressure on import-dependent India by straining government finances and weighing on the rupee.

Traders expect longer-dated bonds to remain under pressure, though narrow spreads with shorter maturities limit the scope for further steepening.

Rates

Overnight indexed swap rates rose tracking rout in U.S. and Indian debt markets.

The one-year rate added 3 bps to 6.19%, the two-year rate jumped 6 bps to 6.4250%, while the five-year rate gained 5.5 bps to 6.6750%.