India 10-year bond yield tops 7%, sees biggest monthly surge in 9 years

MUMBAI: Indian government bonds slumped on Monday, closing out a rough financial year, with the 10-year benchmark bond yield posting its biggest monthly spike in nine years, on bets that a protracted Middle East war would upend the government’s fiscal plans and as the rupee plunged past 95 per dollar.

The 10-year bond yield breached the 7% level for the first time since July 2024 and ended 9 basis points higher at 7.0345%, its highest since May 2024. The yield jumped 37 bps in March, the biggest such move since February 2017.

The rupee plunged to a low of 95.21 against the dollar on Monday, while stocks also tanked.

Bonds were caught in a sharp selloff across the country’s markets that included surging swap rates as investors weighed the risks of the Middle East war escalating further, which could hurt growth and stoke inflation for net energy importer India.

The rupee has weakened past 95, and if the Middle East conflict escalates further, 100 per dollar is no longer a “tail risk” but a scenario that markets will begin to worry about and even price in, said Krishna Bhimavarapu, APAC economist at State Street Investment Management.

The benchmark Brent crude contract was around $115 per barrel, up 60% in March, and set to post its best monthly gain ever on supply worries.

India’s overnight index swap jumped sharply, a trend that has been observed through the month, putting additional pressure on bonds.

“If oil continues to trade higher, the crude basket assumed by RBI in October policy at $70 per barrel will undergo significant revision,” said Alok Sharma, head of treasury at ICBC, Mumbai.

“Swaps are already pricing in 50-100 bps rate hikes in the next one year. The RBI will have to change their tone and adjust their view of lower-for-longer in a structured way to avoid sudden changes in tone and action.”

Rates

OIS rates jumped on Monday amid another round of heavy offshore paying, and also posted record monthly rises across tenors.

The one-year OIS rate ended at 6.24%, up 76 bpsin March, the biggest monthly jump since May 2022, while the two-year OIS rate closed at 6.48%, up 89 bps - its largest-ever monthly move.

The liquid five-year swap rate was at 6.80%, up 81 bps in March, its biggest-ever monthly jump.