India's key-tenor bonds may see relief after October-March supply cut

The word bonds on wooden cubes with office desktop. Business finance stock exchange concept. | Photo Credit: cagkansayin

Indian government bond yields are set to open higher on Monday, tracking a rise in US Treasury yields, although a reduction in October-March supply of liquid five-year and 10-year bonds may offer some relief after a steep selloff in recent weeks.

The benchmark 6.94 per cent 2036 bond yield is expected to trade between 7.06 per cent and 7.11 per cent on Monday, according to a trader with a primary dealership, after ending at 7.1194 per cent on Friday.

“Traders may take some solace in the mild reduction in five-year and 10-year bond supply, as these two segments were heavily battered in the last few sessions,” the trader said.

New Delhi plans to raise ₹7.86 lakh crore ($82 billion) through bond sales between October and March, slightly below earlier projections. The move takes full-year borrowing to ₹16 lakh crore, down from the ₹16.09 lakh crore projected after the first half and ₹17.20 lakh crore outlined in the Budget.

The share of five-year and 10-year bonds in the borrowing mix has been cut to 12.1 per cent and 26.3 per cent, respectively, from 15.4 per cent and 29 per cent in April-September.

The 10-year benchmark bond yield has jumped 36 bps in the last six weeks, while its shorter-duration counterpart has surged 46 bps during the same period.

US Treasury yields stayed elevated, with the 10-year yield hovering around its highest level in nearly two decades, as recent data and comments from Federal Reserve officials reinforced bets on further rate hikes.

Traders now see a 64 per cent chance of another rate increase in October and a 51 per cent probability of a further move in December, according to CME Group’s FedWatch Tool. The Fed raised rates earlier this month, for the first time since 2023.

Expectations of a rate hike by the Reserve Bank of India have strengthened after August retail inflation accelerated to 4.82 per cent and following the US Fed’s latest move, with a majority now expecting an increase next week.

Overnight indexed swap rates are expected to remain rangebound after rising in the previous week.

Last week, the one-year rate added 9 bps to end at 6.16 per cent, the two-year rate also rose 9 bps to 6.37 per cent, while the five-year rate gained 4 bps to 6.6250 per cent.