Soaring crude oil prices drive bond yield to 18-month high

By: |
October 19, 2021 1:00 AM

The 10-year benchmark 6.10%-2031 bond yield touched the highest level of 6.3887% on Monday and ended at 6.3873%. This was nearly 6 basis points higher than its previous close on Thursday.

crude oilBrent crude oil futures contract for December went above the psychological level of $85 a barrel and by the end of market hours, it was trading at $85.71 a barrel

Benchmark yields hit the highest levels in nearly 18 months for the second time this month on Monday following a sharp rise in crude oil prices in the international market and an uptick in US Treasury yields. The yield hit its highest level since April 16, 2020.

“Crude oil prices moving constantly and US 10-year yields inching up had their impact on Indian bonds yields. The 10-year GoI yields went up by 5-6 bps and closed at 6.38%. CPI numbers being lower than expected couldn’t take away the fear of inflation,” said Ajay Manglunia, MD and head of institutional fixed income at JM Financial.

The 10-year benchmark 6.10%-2031 bond yield touched the highest level of 6.3887% on Monday and ended at 6.3873%. This was nearly 6 basis points higher than its previous close on Thursday.

Market participants said mutual funds and foreign portfolio investors were on the selling side in the past few days. According to the data from NSDL, FPIs have pulled out $362.22 million so far in October from the debt segment.

Meanwhile, higher Brent crude oil prices are a big concern for the Indian markets because the country imports 80% of its oil from the international market. Higher prices lead to an increase in inflationary risks and reduce economic growth. Oil prices surged sharply on Monday as demand is continuously increasing amid lower supply.

Brent crude oil futures contract for December went above the psychological level of $85 a barrel and by the end of market hours, it was trading at $85.71 a barrel. “Higher oil prices increase risk of higher imported inflation and this gives less room to the central bank to maintain its ultra-loose policy for a long time,” a dealer with a large state-owned bank said.

The Reserve Bank of India lowered its full-year inflation projection to 5.3% and said it was watchful of the evolving inflationary situation and remained committed to bringing it closer to the target in a gradual and non-disruptive manner.

Adding to this, the suspension of G-SAP operations and rising US Treasury yields also impacted Indian bond yields in the last few days. On Friday, yields on US treasury notes rose to 1.57% after retail sales for September increased. The rising yields on US Treasury notes forced investors to pull money from an emerging market which becomes less attractive to them.

Primary dealers and private banks expect the yield on benchmark to rise further if oil prices keep rising. They expect the yield to trade between 6.35% and 6.42% throughout the week.

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