MUMBAI: Indian government bonds saw a sharp selloff this week, with the 10-year benchmark yield posting its biggest jump in over three years, as a proposed tax tweak stoked concerns of a higher fiscal burden and heavier debt supply.
The 10-year yield ended at 6.5510%, against 6.5278% on Thursday, its highest closing level since March 28.
The yield jumped 15 basis points this week and clocked its steepest weekly gain since the week ended May 4, 2022.
Yields move inversely to prices.
Sentiment soured after Prime Minister Modi introduced sweeping cuts to the goods and services tax, including moving to a two-rate structure of 5% and 18%, scrapping the 12% and 28% rates.
A state ministers’ panel has backed the new structure, fuelling more concerns and leading to fears of fiscal slippage that could nudge the government to undertake additional borrowing.
Traders fear there is little relief in sight as heavy supply continues. New Delhi sold 300 billion rupees of the benchmark bond on Friday, near estimated levels.
Fiscal worries, fresh debt supply drag India bonds lower
“Auctions are sailing through despite uptick in yields, indicating the government is comfortable borrowing at these levels, so the market is unsure where yields will stabilize,” said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.
“Traders are buying at auction and shorting right after, and this will continue till there is clarity on debt supply.”
The market is also awaiting Federal Reserve Chair Jerome Powell’s speech at Jackson Hole later in the day.
Analysts expect a possible compromise, potentially opening the door to a September cut, though Powell may not commit to further reductions until inflation eases.
Rates
India’s overnight index swap rates were largely unchanged in thin trades, as traders awaited Powell’s comments.
The one-year OIS rate ended at 5.5250%, while the two-year OIS rate was at 5.4850%. The liquid five-year OIS settled over 1 bp higher at 5.7400%.
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