India's benchmark bond yield hits 1-1/2 yr high as crude rally continues

MUMBAI: India's benchmark 10-year bond yield rose to its highest level since April 2020, as a sustained rise in global crude oil prices raised concerns around domestic inflation and its resultant impact on the central bank's ability to retain policy stimulus.

On Monday, the benchmark 10-year bond yield was trading at 6.38% at 1014 GMT, up 5 basis points from its previous close and at its highest since April 17, 2020.

Markets were closed on Friday for a religious festival.

Oil prices hit their highest level in years on Monday as demand recovered from the COVID-19 pandemic, boosted by more customers from power generators turning away from expensive gas and coal to fuel oil and diesel.

India imports 80% of its oil needs and high prices are likely to translate into higher domestic inflation, which could force the central bank to act on rates or reduce the liquidity stimulus sooner rather than later.

"The view on bonds is bearish given the overall macro environment," said Bekxy Kuriakose, head of fixed income at Principal Asset Management.

"Domestically - lack of G-SAP (government securities acquisition programme) support and growth pick-up and globally due to the rise in US treasury yields, central banks are either tapering, hiking or warning of hikes," she added, predicting a rise to 6.5% on the 10-year yield by year end.

Traders said though there is ample rupee liquidity in the banking system, the central bank's decision to not continue with GSAP and conduct only ad-hoc open market operations as and when necessary is likely to keep the upward pressure on yields.

Foreign investors have sold debt worth $613.75 million so far in October, taking total sales in 2021 to $2.14 billion.

US Treasury yields rose on Friday and a market indication of inflation expectations hit the highest since 2005 as an unexpected increase in US retail sales in September added to bearish bond sentiment about the path of interest rates.

The partially convertible rupee ended at 75.34/35 per dollar compared to its close of 75.2550.

Overnight indexed swap rates too rose to their highest levels in more than a year-and-half as traders started to price in rate hike expectations.

The benchmark 5-year OIS rate climbed 14 bps on day to 5.60%, its highest since Jan. 22, 2020 while the 1-year OIS rate rose 7 bps to 4.10%, its highest since April 15, 2020.