India benchmark bond yield climbs to nearly 11-month high on deepening supply woes

MUMBAI: India’s government bonds yields surged on Tuesday, sending the benchmark yield to a nearly 11-month high, pressured by heavy state borrowing, tight system liquidity and subdued risk appetite.

The benchmark 10-year 6.48% 2035 bond yield settled at 6.7194%, its highest level since March 4, versus Friday’s close at 6.6635%.

Indian financial markets were closed on Monday due to a local holiday.

Rising supply worries eclipsed the central bank’s fresh plans to inject liquidity into the banking system.

The Reserve Bank of India said after market hours on Friday that it would inject more than $23 billion of liquidity into the banking system.

However, the market was hit by a large supply of state debt during the day, with the states selling 398 billion rupees of bonds at slightly elevated yields. States have announced a record borrowing of 5 trillion rupees for the January-March period.

The government is also expected to announce a record gross borrowing plan for the next fiscal year, ranging between 16 trillion rupees to 17.5 trillion rupees, a supply glut that traders fear will weigh on bonds further.

Indian bond yields have risen in recent weeks despite record RBI bond purchases and 100 basis points of rate cuts already delivered this year, reflecting unfavourable demand–supply dynamics for debt, exacerbated by news of the deferral of index inclusion.

“Despite the RBI resuming its rate cutting cycle in December, the rate transmission has stalled meaningfully thanks to tight liquidity conditions,” economists at BofA Securities wrote in a note.

India’s average bank liquidity surplus stayed at 0.2% of bank deposits in January, with the daily average at 569 billion rupees, even as Governor Sanjay Malhotra had said the RBI wants to keep surplus within the 0.6%-1% range of deposits.

RATES

India’s overnight index swap curve steepened further, driven by tight liquidity.

The one-year OIS was slightly down at 5.5925%, while the two-year rate was up 3.25 bps at  5.76%.

The five-year OIS rate 4.25 bps to 6.18%.