Indian government bond prices fell for a third day in a row on Friday, pushing yields up and wiping out close to half of the previous week’s decline. Rising inflation at home and abroad has left investors unsure about where interest rates are heading.
The benchmark bond maturing in 2036, which carries a 6.94% coupon, closed at a yield of 7.3079%. That was up from 7.2467% on Thursday. Bond yields rise when prices fall, so the move reflects selling. For the week, the yield has climbed 12 basis points, after dropping 22 basis points the week before.
Umesh Tulsyan, managing director at Sovereign Global Markets, said Indian bonds have given back more than half of the sharp rally seen last week. He said investors are reassessing the outlook for interest rates.
Several factors drove the reversal. US Treasury yields have risen, inflation has come in higher than expected in both the United States and India, geopolitical tensions have returned, and traders have been cautious ahead of a large government bond auction.
Auction adds pressure
Earlier on Friday, the government sold 340 billion rupees ($3.61 billion) worth of the benchmark bond. That lifted the total outstanding amount of the paper to a record 2.72 trillion rupees, the highest for any single bond.
US yields climb
The 10-year US Treasury yield was around 5.12% on Friday. It has risen 26 basis points this week and is on track for its biggest weekly jump in seven months.
Yields in the US have been trending higher since October consumer price data came in stronger than expected. That led traders to raise their bets that the Federal Reserve could choose a larger-than-usual rate increase at its meeting on December 9. Traders now put the chance of a 50 basis point move at 14%, up from zero a week earlier.
India’s inflation picture worsens
Domestic conditions have also turned less favourable. Retail inflation rose to 6.09% in October from 5.54% in September. That took it above the upper tolerance band of the Reserve Bank of India’s target. The data has strengthened expectations that the central bank will raise rates again in December.
Swap rates follow bonds higher
Overnight index swap rates also moved up through the week, tracking local and US bond yields. They have recovered almost half of last week’s drop. The one-year rate ended at 6.50%, the two-year at 6.51% and the five-year at 6.61%. Across the week, swap rates rose by roughly 13 to 17 basis points.