10-year bond yield ends higher as oil prices surge

The benchmark bond yield ended higher for the second day in a row by 2 basis points on Monday due to a sharp rise in oil prices and US Treasury yields. Yields on a 10-year benchmark bond rose nearly 7 basis points over two trading sessions. The 6.10%-2031 benchmark bond yield ended at 6.2087%, as against the 6.1810% close of the previous trading session.

“Global factors have once again taken centre stage. Bond yields have moved up in the last few days, tracking rising crude oil prices and Treasury yields,” said Pankaj Pathak, fund manager, fixed income, at Quantum Asset Management.

Brent crude oil prices rose for the fifth day in a row on Monday owing to increased demand across the world following easing of Covid-19 restrictions due to increase in vaccinations. But the supply remains low. At the close of the market, Brent crude was trading at $79.08 a barrel for the November maturity.

Market participants said the rise in oil prices posed a risk of rising inflation, which has moderated recently after breaching the Reserve Bank of India’s upper tolerance band twice in May and June. The inflation risk is rising because India imports a heavy supply of crude oil requirements.

“Higher crude oil prices pose inflation risks in India, which import nearly 85% of its crude oil requirements,” said Kunal Sodhani, AVP, Global Trading Center, Shinhan Bank India.

Meanwhile, the benchmark yield has also risen because on Friday, the US Treasury yield had increased by 6 basis points to 1.47%. The sharp rise in US Treasury yields followed comments by US Federal Reserve chair Jerome Powell that the Fed would soon start tapering its bond-buying programme of $120 billion monthly.

Dealers said the rise in US Treasury notes becomes more appealing to foreign investors than securities in the emerging market. Also, the rising yields on US Treasuries and tapering by the Fed will caution the RBI while making policy decisions. “Fed’s tapering of asset purchases will have implications for the domestic monetary policy as well,” Pathak said.

Besides, the appetite of most traders is low because the borrowing calendar of the central government is expected to be announced later this week. A dealer with a private bank said higher borrowing will put pressure on benchmark yield in the coming days. Considering this, they expect yields on benchmark bonds to trade between 6.15% and 6.25%.

“Traders continue to wait for details of the borrowing calendar for the second half. Bonds may trade defensively in the near term as long positioning interest weakens in light of RBI monetary policy, which is due on October 8,” Sodhani said.