MUMBAI: Indian government bonds ended sharply down on Friday, marking a second straight session of falls, as investors feared a potential spike in inflation after global oil prices scaled nine-month highs.
Brent crude oil hit a nine-month high near $115 a barrel on Friday as the United States threatened military action against Islamist militants who have taken towns and cities in Iraq, raising concerns over its oil exports.
On the week, the 10-year benchmark yield rose 9 basis points, the highest weekly rise in two and a half months since April 4.
The respite from domestic consumer prices inflation cooling to three-month low of 8.28 percent in May proved to be short-lived.
Meanwhile, investors were also cautious as the threat of below-average monsoon rains loom over the inflation outlook.
India's monsoon rains were 48 percent below average levels in the week to June 11. India's farm sector accounts for 14 percent of its nearly $2 trillion economy. Poor rains this year could hit the summer crops, raising food prices and pressuring economic growth.
"If crude oil prices do not spike from here, then 10-year yield should get supported within 5-10 basis points because markets are sitting at the end of around 40 bps rally since April.
I would look for some consolidation," said Suyash Choudhary, head of fixed income at IDFC Mutual Fund in Mumbai.
Since the start of the fiscal year in April, the 10-year yield has fallen 36 basis points as on Friday.
Next week, traders will continue to look out for any further spikes in oil prices and back home will watch for data on wholesale prices inflation on Monday and the US Federal Reserve's policy decision on Wednesday.
The benchmark 10-year bond yield ended up 5 basis points at 8.60 percent. Intraday, the yield rose 9 basis points.
The benchmark five-year swap rate ended unchanged at 7.80 percent and the one-year rate ended up 2 bps at 8.25 percent.
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