Indian government bond yields jumped in early trading on Friday, with the benchmark yield near a three-week high, tracking a spike in U.S. peers and as traders braced for fresh supply from a weekly debt auction. The benchmark 7.26% 2033 bond yield was at 7.1621% as of 10:00 a.m. IST, after ending the previous session at 7.1227%. Earlier in the day, the yield hit 7.1658%, its highest since July 10.
“The surprise upmove in U.S. yield to above 4% is a negative shock, and local traders have turned completely cautious now,” a trader with a private bank said. “This should definitely have an impact on debt auction demand, and if cutoffs are bearish, another round of selling could follow.”
U.S. yields jumped on Thursday, with the 10-year rising above 4%, after robust data showed the world’s largest economy is on a solid footing, defying fears of a recession despite the Federal Reserve‘s aggressive tightening. Earlier this week, the Fed raised interest rates by a widely expected 25 basis points (bps) and indicated another increase, but the market was not convinced by it. The odds of such a move are just 20%.
Even as traders believe that the Fed rate hike cycle has ended, they expect the rates to remain higher for a longer duration. Meanwhile, New Delhi aims to raise 330 billion rupees ($4.01 billion) through the sale of bonds later in the day and the auction includes 140 billion rupees of benchmark paper.
Traders also remained worried about a spike in inflation in the next couple of months, which could force the Reserve Bank of India to turn extra hawkish. Nomura and IDFC First Bank expect July retail inflation to climb above the RBI’s tolerance zone. India’s retail inflation jumped to 4.81% in June, after easing in the previous four months.