India bonds may steady after rout, but US yield, supply risks persist

MUMBAI: Indian bonds are likely to find a wary foothold early on Tuesday after a punishing rout drove the benchmark yield to a more than two-year high, though elevated US yields, sticky oil prices and supply are likely to keep the market on edge.

The yield on the benchmark 6.94% 2036 bond may trade in a 7.15% to 7.20% band, traders said, after ending at 7.1848% on Monday.

US Treasury yields eased in Asian trade after scaling multi-year peaks overnight, as markets braced for a more forceful Federal Reserve tightening cycle.

The 10-year yield touched its highest since June 2007 before retreating, and was last at 5.23%.

Brent crude futures were up 1.3% at $106.65 a barrel in Asian trade, keeping inflation risks elevated.

Traders closely watched developments on the war front, as US and Iranian officials spoke separately with mediators on Monday, renewing efforts to end the war.

Costlier oil has hardened the case for a Reserve Bank of India rate hike at next week’s policy meeting, traders said, leaving little room for a sharp bond-market recovery.  

Supply overhang

The government’s October to March borrowing plan has added to the unease by shifting issuance towards the 15-year and ultra-long segments, where demand is thinner.

The 15-year and 30-year tenors account for 26.8% of planned supply, up from 21.8% earlier.

“Even as lower supplies bode well for the bond markets, the backdrop of elevated DM yields lowers the likelihood of INR 10Y rate retracing below 7% in the near-term,” DBS Bank said in a note.

Traders also fear that further bond sales by the central bank to drain surplus liquidity could deepen the supply overhang.

The central bank has net sold bonds worth 1 trillion rupees so far this financial year, its largest annual net sale in more than a decade.

States will auction 222 billion rupees of bonds later in the day, likely at lower prices.