Indian government bonds fell on Wednesday. A sharp sell-off in US Treasuries, prompted by hotter-than-expected inflation figures, outweighed the relief that lower crude prices gave the market.
Bond yields move opposite to prices, so when yields rise, bond prices fall. That is what happened across the board on Wednesday.
The 10-year US Treasury yield climbed more than 12 basis points to 4.9830% in Asian trading. The move followed October inflation data that came in above forecasts. Fed policymakers also signalled that they could raise rates at a faster pace.
Higher US yields make riskier Indian debt less attractive, because they shrink the extra return it offers. That reduces its appeal to foreign investors.
Domestically, the benchmark 6.94% bond maturing in 2036 saw its yield rise by around 5 basis points from Monday’s close. By 10:40 a.m. IST, it stood at 7.2005%. Markets were shut on Tuesday for a holiday, so Wednesday’s move built on the previous session’s close.
Traders also sold the 10-year bond ahead of Friday’s auction. The government plans to sell 340 billion rupees ($3.62 billion) of debt, a sizeable addition to supply that is weighing on sentiment.
Oil offers some relief
Brent crude has dropped $6 over three sessions to $92.4 a barrel. The fall came after US officials played down the prospect of further military action against Iran. Oil edged higher on Wednesday, after sliding to a two-month low of $91.41 in the previous session.
Cheaper oil eases pressure on India’s inflation and fiscal position. However, investors fear that rising odds of a December Fed rate hike could push the Reserve Bank of India to tighten policy as well.
A private-bank trader said US consumer price data had reinforced the chance of a Fed hike in December. In his view, that raises the likelihood that the RBI also lifts rates at its upcoming policy meeting.
Inflation data in focus
Attention now turns to India’s October inflation figures, due Thursday. A Reuters poll expects annual inflation to reach 5.93%, up from 5.54% in September. A stronger-than-expected reading could add to expectations of tighter policy.
Swap rates rise too
Overnight index swaps also climbed sharply, tracking the move in US yields. The one-year, two-year and five-year rates rose by 7 to 8 basis points, to 6.38%, 6.3850% and 6.48% respectively.
The rupee was quoted at 93.9275 to the dollar.