India bonds slump on Fed rate hike bets, benchmark trades at discount
- The yield on the benchmark 6.94% 2036 bond was at 6.9480%
MUMBAI: Indian government bonds fell on Monday, with the benchmark paper slipping into discount, as hawkish comments from US central bank chief bolstered expectations of an interest rate hike next month, and as oil prices jumped above $90 a barrel.
The yield on the benchmark 6.94% 2036 bond was at 6.9480% as of 10:45 a.m. IST, after closing at 6.9108% on Friday. Earlier in the session, the yield touched 6.9538%, its highest level since June 11.
Bond yields move inversely to prices.
“Sentiment has turned distinctly bearish as a more hawkish Fed, rising crude prices and the local central bank’s readiness to act on inflation leave little room for yields to ease,” a trader with a state-run bank said.
US Treasury yields rose sharply on Friday, led by the policy-sensitive two-year note, after Federal Reserve Chair Kevin Warsh said the central bank would still “have work to do” if officials were not convinced inflation was moving sustainably toward 2%.
Warsh’s comments were seen as the clearest signal yet that policymakers could consider rate increases if inflation remains sticky, and boosting bets of a rate hike next month. Markets are now assigning a 60% probability to a September move, up from 35% before the commentary.
Oil prices added to the pressure, as the benchmark Brent crude rose above $90 a barrel in Asian trade after US forces struck Iran’s Larak Island on Sunday, the first reported strikes inside Iran since late July.
For India, which imports most of its oil needs, a sustained rise in crude prices could worsen the inflation outlook, and impact government finances.
Minutes of the Reserve Bank of India’s August meeting showed policymakers remained prepared to raise interest rates if upside inflation risks materialise.
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