India bonds rout deepens on OIS jitters; US Fed policy eyed

MUMBAI: Indian government bonds slumped for a second straight session on Tuesday, weighed by heavy paying in overnight index swaps and caution ahead of the U.S. Federal Reserve’s policy decision.

The benchmark 10-year yield was at 6.6161%, compared with Monday’s close of 6.5697%. The yield on the 6.48% 2035 note was up 5.5 bps at 6.5902%.

Bond yields rise when prices fall.

The 10-year benchmark bond yield has risen 10 basis points since Friday, even as the Reserve Bank of India announced a 25-basis-point cut along with measures to infuse liquidity.

Since the policy verdict, there has been heavy paying in the overnight index swaps, especially from offshore, which has dampened sentiment in the bond market, traders said.

The five-year overnight index swap rose 12 basis points in the previous session — its biggest single-day jump since May 8 —amid aggressive position cutting from offshore investors. It was up 5.5 bps on Tuesday.

Traders are now pensively watching for the Federal Reserve’s monetary policy decision due late on Wednesday, where the Fed is widely expected to deliver a rate cut. Traders, however, fear the decision may be followed by hawkish guidance and a slower pace of cuts in 2026.

Separately, foreign players and some corporates are likely leading the selling, traders said.

“Foreign players are likely on the sell side. There are no aggressive buyers in the market, which has lifted the yield curve,” said Alok Singh, head of treasury at CSB Bank.

RATES

India’s overnight index swap rates continued to rise on Tuesday, driven mainly by paying pressure from offshore investors, traders said.

The one-year OIS rose about 2 bps to 5.48% and the two-year swap settled over 4 bps higher at 5.5950%. The five-year OIS rate ended at 5.9550%.