India bonds edge up on short covering as US yields cool

Indian government bonds edged higher on Tuesday after a sharp selloff pushed the benchmark yield to a more-than-two-year peak, as softer US Treasury yields prompted investors to unwind short positions.

The yield on the benchmark 6.94% 2036 bond was at 7.1679% at noon, down about 2 basis points from Monday's close. Bond yields move inversely to prices.

"Today buying emerged on several factors, including reports of constructive US-Iran talks and investor demand around the 7.19% level, where the spread over the repo rate has widened to nearly 200 basis points," said Umesh Tulsyan, managing director at Sovereign Global Markets.


"At around 7.20%, the risk-reward for the 10-year bond appears more balanced, rather than decisively bearish."

US Treasury yields retreated after hitting multi-year highs. The 10-year yield, which had briefly climbed above 5.26%, was last at 5.23%.

Treasuries set the tone for global borrowing costs. Major sovereign bond markets are heading for their worst month in years as elevated energy prices stoke inflation concerns, while resilient growth reinforces expectations that interest rates will remain higher for longer.

For India, higher global yields and inflation pressures have strengthened the case for a Reserve Bank of India rate hike at next week's policy meeting, traders said.

Domestic supply and liquidity conditions remain additional headwinds. The government's October-March borrowing plan has tilted issuance towards 15-year and ultra-long bonds, segments where demand is relatively thin.

The RBI has drained liquidity through dollar-rupee sell-buy swaps, spot dollar sales, bond sales and variable-rate reverse repos.

Along with tax outflows, these steps have more than halved the banking system's liquidity surplus from a record 11.16 trillion rupees ($116.10 billion) in the first week of the month.

RATES

Overnight indexed swap rates declined as US yields eased.

The one-year rate dropped 4.25 bps to 6.2%, the two-year eased 4.5 bps to 6.43%, and the five-year fell 4.25 bps to 6.68%.