Indian government bonds witness crash today: What's the reason?
What's the story
Indian government bonds witnessed a steep decline today, pushing the benchmark 10-year yield to a two-year high. The rise in yields is primarily due to a shift toward longer-dated bonds, which has heightened trader concerns over potential rate hikes. The Centre plans to raise ₹7.86 trillion through bond sales by March, further adding to market pressures.
Market response
Shift in bond preferences rattles market
Despite the overall borrowing being slightly lower than earlier estimates, the market was rattled by a shift from popular five- and 10-year bonds to 15-year and ultra-long debt.
"With markets increasingly positioning for RBI tightening and the global policy backdrop remaining skewed toward further rate hikes, there remains scope for India rates spreads to narrow further," DBS Bank said in a note.
External influences
Global factors contribute to local bond market pressure
The rise in the benchmark 6.94% 2036 bond yield to 7.1708% by noon today, its highest intraday level since May 2024, is also due to global factors.
The US Treasury yield hit a nearly two-decade high of 5.21%, while Brent crude oil prices surged by 2.7% to $107.15 per barrel.
These developments are expected to keep longer-dated bonds under pressure and narrow spreads with shorter maturities in the Indian bond market.
Central bank stance
Anticipated RBI rate hike and swap rates surge
The increased duration supply comes as the Reserve Bank of India (RBI) is expected to hike rates next week.
This expectation has been bolstered by August retail inflation accelerating to 4.82% and the US Federal Reserve's recent action.
Overnight indexed swap rates have also risen, tracking the rout in US and Indian debt markets, with one-year rate rising by 3bps to 6.19%, two-year rate jumping by 6bps to 6.4250%, and five-year rate gaining by 5.5bps to 6.6750%.