India 10-year yield scales two-year high as supply, global rout bite

Rising global yields and fresh domestic supply concerns hammered Indian government bonds on Monday, propelling the benchmark 10-year yield to an over two-year high.

The benchmark 6.94% 2036 bond yield climbed 6.5 basis points to 7.1848%, hitting its highest level since April 2024.

Stop-loss selling swept through bonds and overnight indexed swaps, traders said, opening the way for a test of 7.25% on the 10-year yield.


New Delhi's October-March borrowing calendar, released on Friday, unsettled traders by tilting issuance away from liquid five- and 10-year bonds and toward 15-year and ultra-long securities.

While the headline borrowing estimate was marginally below earlier projections, the maturity mix sharpened duration risk, or the risk of falling bond prices as interest rates rise.

Traders expect an RBI rate increase next week - its first since February 2023. Investors tend to avoid longer-dated bonds when rates are rising, as they are exposed to greater mark-to-market losses. Relatively tight spreads over shorter maturities may however limit further curve steepening, traders said.

Market participants also fear further Reserve Bank of India open market bond sales to drain surplus liquidity in the banking system, which further added to supply woes.

The RBI completed 1 trillion rupees of net debt sale on Monday, its biggest annual net bond sale in more than a decade.

"We have moved to a clearly bearish duration stance," Baroda BNP Paribas Mutual Fund said, citing robust economic growth, food and energy inflation risks, elevated global yields, surplus liquidity and the RBI's pivot from VRRR absorption to outright OMO sales.

The global backdrop offered little relief: the 10-year US Treasury yield rose 5 bps to 5.23%, at over two-decade highs, while Brent crude gained 4% to trade above $108.

RATES

OIS rates rose in tandem with Indian and global bond yields.

The one-year rate added 7.5 bps to 6.2350%, the two-year rate jumped 8.5 bps to 6.45%, while the five-year rate surged 10 bps to 6.72%.