India bonds could face headwinds from RBI debt sale, elevated Treasury yields

MUMBAI: Indian government bond market traders could once again try to push prices higher at the start of the week after witnessing declines in oil prices, but elevated Treasury yields and a debt market sale could cap the move.

The benchmark 6.94% 2036 bond yield is expected to trade between 7.05% and 7.09% on Monday, according to a trader with a primary dealership.

It ended at 7.0686% in the previous session.

The yield has jumped 31 basis points in the last five weeks.

Oil prices eased in Asian hours as investors eyed a recovery in shipments from Saudi Arabia despite ongoing attacks by Yemeni Houthis that have escalated tension in the Middle East, while the US and Iran remain in a stalemate.

The benchmark Brent crude contract was down 2.3% on Monday to $101.50 per barrel, after hitting a high of almost $110 last week.

“Oil can be called marginally supportive, but a firm push is needed below $100 per barrel for the 10-year yield to dip to anywhere close to the 7% mark,” the trader said.

Meanwhile, the Reserve Bank of India will sell bonds worth 250 billion rupees ($2.61 billion), through an open market sale, in what would be its second such operation in its series of steps to withdraw liquidity from the banking system.

Last week, the central bank absorbed liquidity equivalent to nearly 0.2% of total bank deposits, with its first debt sale operation in nine years worth 500 billion rupees.

Rate hike bets in India have also hardened after the Federal Reserve’s move, with many now expecting the RBI to raise the repo rate by 25 bps on October 7.

The 10-year US Treasury yield stayed sticky around 5%, after the Fed hinted at one more rate hike before the end of 2026.