India bonds seen under strain before Fed decision as oil, global yields rise

MUMBAI: Indian government bonds may edge lower early Wednesday as higher crude prices and global yields curb demand ahead of the US Federal Reserve’s policy decision, with a rate hike likely to reinforce RBI tightening bets after elevated inflation.

The benchmark 6.94% 2036 bond yield is expected to trade between 7.05% and 7.12%, according to a private-bank trader.

It closed at 7.0727% on Tuesday, its highest level in four months.

Sentiment has also deteriorated ahead of the Reserve Bank of India’s planned open market sales, which traders fear will strain an already fragile supply-demand dynamic.

The RBI will sell 1 trillion rupees ($10.42 billion) of bonds in three tranches beginning Thursday.

“We have opened a can of worms; OMO sales are adding to the supply at an uncertain time, when there is no confidence to buy,” a private-bank trader said.

Brent crude futures climbed 3.5% to $108 a barrel in Asian trade as fighting spread across the Middle East.

US Treasury yields eased marginally after testing multi-decade highs in the previous session.

On Tuesday, the 10-year US Treasury yield briefly rose above 5%, its highest since the 2008 financial crisis.

The average 10-year yield across the Group of Seven largest economies reached 4.285%, the highest since mid-2008.

At home, analysts hardened bets on an October RBI rate hike after annual CPI inflation rose to 4.82% in August from 4.45% in July.

Deutsche Bank has brought forward its rate-hike call to October, citing the prospect of a Fed tightening cycle.