Rising crude prices, spike in US treasury yield spook investors
Government bond yields hit an over four-month high on Wednesday on outflows sparked by selloff in bond markets across the globe. A steady rise in global crude oil prices and a spike in US treasury yields contributed to the negative sentiment.
The yield on the benchmark 10-year 8.40%, 2024 bond settled at 7.89%, up four basis points from Tuesday’s close. It has now risen 16 bps since April.
While the spike in the 10-year yield is also partly due to expectations of a fresh benchmark 10-year bond issuance by the government, most other bond yields have risen, reflecting the concerns over rising oil prices. For instance, the next most traded 8.60%, 2028 bond yield has risen 20 bps since April.
“Oil prices going up and the selloff in equities have resulted in some pressure on the bond market here. However, we have performed well compared with other markets where the fall has been higher,” said Jayesh Mehta, managing director and head of treasury at Bank of America-Merrill Lynch.
The 10-year US bond yield touched a two-month high of 2.2% on Tuesday on the back of a strong services sector data and a rise in oil prices. Bond yields across Asia and German bunds hit the highest level in 2015 so far, as investors took note of the rising commodity prices.
According to bond traders, the rise in global crude oil prices could potentially disturb the RBI’s inflation trajectory and, thereby, reduce the room for further rate cuts.
“The weak currency and the rising oil prices are the main reason why bond yields have gone up, but this, I believe, is temporary,” said NS Venkatesh, head of treasury, IDBI Bank. Venkatesh expects a 25-bps cut in the repo rate at the June policy.
Brent crude oil price has climbed 2.8% in the last two sessions and is up a massive 22% since January. It was trading at $68.68 per barrel on Wednesday.
The rise in oil prices has fanned concerns over potential inflationary pressure through the import channel. Coupled with the forecast of weak rainfall and the consequent impact on agriculture, market participants worry that inflation may not adhere to the RBI’s forecasted path.
In its policy statement in April, the RBI had forecasted an ease in retail inflation to 4% by August and, then, a bounce back to 5.8% by March 2016 and had said that if inflation sticks to the predicted trajectory, it could cut rates further. The consumer-price-index-based inflation was 5.17% in March.