India bonds track Treasury weakness ahead of debt supply

Indian government bonds extended losses for a second day on Thursday, shadowing a Treasury selloff, while traders braced for a large 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.


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.

RATES

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.